Your biweekly update on edible oils & fats by Aveno.

Bi weekly dd July 8th 2024.

The euro gained some strength, helped by sticky high inflation numbers which suggest the ECB wouldn’t be in a hurry to cut interest rates again.

Petroleum

In June Brent prices increased by more than 6% and so far, July seems to be following the trend. The market sentiment turned bullish not only on geo-political-tensions in Ukraine and the Middel East (putting at risk Iran’s oil production and shipping infrastructure) but on good demand and less good supply. Petroleum supply threats from Hurricanes and a bullish oil inventory report from the US Energy Information Administration (EIA) pointing to good summer demand, etc. Optimistic analysts see Brent going to $90 this summer…. We shall see. But that being the case could be bullish for everything else.

Palm oil

In Kuala Lumpur, palm oil futures rose above 4000 Malaysian Ringgit/mt for the second time since mid-April, on concerns over subdued production and on tracking the evolution of competing edible oils and higher petroleum prices. In addition to support from soybean oil and energy prices, Malaysia's palm oil production in June is expected to be lower than in May. Market players therefore remained cautious ahead of Malaysia's monthly export and production MPOB report on July 10th. 

Malaysia’s June palm oil stocks are expected to rise for a third month in a row and in the meantime, it was also noted that exports would have fallen between 12 and 15% last month. Nevertheless, prices remained firm, boosted by reports that palm oil imports in India rose 3% in June to a six-month high of 788,000 mt, reflecting strong demand ahead of the next festival season (India's main festival season starts in August) and India’s palm oil imports could reach 850,000 tons in July. Stock evolution is important but the evolution of soybean oil prices will be key to watch as we go along.

Soybean oil

When the South American soybean harvest ended, the market behaved as if there were too many beans in the US and the South American harvest was better than what most people think. It seems all bearish news is now priced in and that differing opinions create market nervousness. In the US, the old crop market is tight because farmers are not selling and want at least $13/bushel for their beans while on Friday soybean august futures closed at $11.66/bushel. On-farm storage is up 44% from last year and farmers have 430 million bushels (11.7Mmt) of beans in storage (harvest is in Sep-Oct with total US production estimated at 121Mmt).

After a pullback, soybean futures in Chicago saw some positivity sparked by the June USDA report, which estimates soybean acreage this year at 86.1 million acres, up 3% from 83.6 in 2023, but lower than the initial forecast of 86.51 million hectares in the March 28 Plantings report. In addition, the market expects a further decrease in area after recently flooded areas have been fully measured up.

Weather is a critical factor influencing agricultural commodity markets, from planting to harvesting but especially during the growing season. As we approach the critical period for soybeans in the US, the market is focused on the extremely wet start for the heart of the Midwest, with flooding along the Missouri and Mississippi rivers. Nevertheless, Weekly Crop Progress data showed that 20% of the US soybean crop was flowering at the end of June, which was 5% above normal and crop condition remained unchanged at 67% good to excellent.

Still, soybean futures rebounded on short covering just before the 4th of July holiday as the market was oversold. China also booked higher volumes in recent weeks, attracted by lower prices and the prospect of D. Trump returning as president with escalating trade tensions again. But the real support came from bean oil futures which gained more than 600 points since bottoming on June 25th.

Soy oil is competitively priced, also for renewable diesel production, and at the end of June the Commitment of Traders Report showed that managed money had a net short of 110,000 contracts (position almost doubled in the past month) despite good oil demand and higher prices of competing oils. A large short position on bean oil with explosive potential in case of profit taking. As a result, soybean oil futures in Chicago rose on short covering by the funds and helped by higher petroleum prices.

It remains to be seen if the managed money shorts in soy oil continue to hit the panic button or if they sweat it out. A new wave of fund coverage could further fuel the OIL futures rally…. the opposite is also possible.

Weather will play an important role in price movements, but other factors include demand and eventual imports of cheaper alternatives for soy oil, creating more competition, as well as developments in biofuels and sustainable aviation fuels (SAF) demand.

Rapeseed oil

Production risks for rapeseed in NW-EU remain the focus, as are the rising prices of soy oil and petroleum. The upward price trend for rapeseed has been supported by higher petroleum prices and in EU, the biofuels sector is also getting a boost from this upward rally as biodiesel margins remain solid, thus driving continuous demand for rapeseed oil. In EU, weather conditions have shown signs of improvement, but a return of showers is already expected and potential yields/hectare and oil content of the seed have deteriorated after an extremely rainy spring. Rapeseed prices recovered to above €500/ton. 

The start of harvest has refocused the market's attention on the low yield and quality of the EU crop. Rains delayed harvesting and worsened yield prospects in NW EU while Romania suffered from drought. All this prompted observers to further lower their estimates for this year's rapeseed crop in EU.

In Canada rapeseed markets also experienced an upward trend, driven by good domestic and international demand. The predicted showers in all production areas may lead to flooding…., but StatCan also increased its estimate of Canadian acreage this year by 600,000 hectares to 22M hectares, in line with last year's 22.1Mha.

Sunflower seed oil

Sunflower seed oil reacted the least to the price increase in the vegetable oil complex, particularly for old crop as Ukraine appears to still have large stocks. Sunflower oil prices in the Black Sea region continued to be under pressure from 'an increasing number of offers popping up and a wait-and-see attitude on the part of buyers. The record May/June exports and good market coverage are putting a damper on old-crop sunflower seed oil prices.

With sunflower plantings completed in Ukraine, Russia, Bulgaria and Romania, estimates for the “Black Sea sunflower crop” range from an optimistic 38Mmt (similar to the 23/24 season) to a pessimistic 34Mmt, which would be around 10% lower than last year. We are now entering a critical weather period for sunflower growth in Russia, Ukraine and Eastern Europe. For EU, sunflower seed production was revised down vs. last month, following dry and hot June weather in Romania and incessant rains in France which have caused some problems. But EU-27 sunflower seed production in 2024 is still expected to be 8% higher than last year.

Nevertheless, strength on the soybean oil side pushed up sunflower seed oil prices and the weather risk for August, coupled with the already lower production expectations in the EU/Black Sea area, brought additional support.

Olive oil

More than 90% of global olive oil production comes from the Mediterranean, which is allegedly “a climate change hotspot” and which, some say, is warming up 20% faster than average. Be that as it may, the olive tree is well adapted to a dry climate, but extreme drought activates mechanisms (to protect the tree) that stop production.

In the two previous seasons, growers saw an unprecedented drop in production due to heat waves and extreme drought in the main producing countries Spain, Italy and Greece. This caused price increases forcing many customers to drop out and choose cheaper oils. In Spain, which supplies half of the world's olive oil, prices even tripled since the beginning of 2021. To mitigate this the Spanish government reduced the VAT from 5 to 0% from this month onwards. Olive oil will be part of a basket of basic goods that include bread, fruit and vegetables to which normally 4% applies but in case of high inflation this can be reduced to 0%.

Global olive oil production dropped about 25% to only 2.6Mmt in the 22-23 season and only 2.5Mmt is expected this season. The market is now in a “relaxed hand-to-mouth-buying-mode” anticipating good harvests in about four months, for the 24-25 season, thanks to earlier beneficial rains. Producers, however, point out that supply shortages as a result of the low carry out stocks from previous and present seasons will not vanish overnight, which could be quite price supportive for still quite a while.

Biofuels

In the US, biofuel producers are shifting their focus to sustainable aviation fuel in an attempt to counter low earnings from renewable road diesel.

In Germany “The Lufthansa Group is introducing an Environmental Cost Surcharge intended to cover part of the steadily rising additional costs due to regulatory environmental requirements. Including the statutory blending quota of initially two percent for Sustainable Aviation Fuel (SAF) for departures from European Union (EU) countries from January 1, 2025, adjustments to the EU Emissions Trading System (EU ETS) as well as other regulatory environmental costs such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).”

And SHELL announced to “temporarily pause on-site construction work at its 820,000 mt/year biofuels facility at the Shell Energy and Chemicals Park Rotterdam in the Netherlands…. /…. The facility is designed to produce sustainable aviation fuel (SAF) and renewable diesel made from waste.”