Some economic woes, some weather woes and lots of oil coming.



Some economic woes, some weather woes and lots of oil coming.

Your biweekly update on edible oils & fats by Aveno.
Bi weekly dd August 5th 2024.



Soybean futures dropped after a slight rebound mid-July, under pressure from expectations of a more than adequate global supply. This pressured other oilseeds and oils. In the US, favorable weather weighs heavily on soybean prices and market players also worry about a slowdown in global demand, especially from China. 



It is important too, to realize that a large pool of oil is coming at us and that it will temporarily be offsetting any bullish fundamentals. The rapeseed harvest in EU is almost behind us, in September the first US soybeans come off the land, we’ll have the sunflower seed harvests in the Black Sea region and in western EU, then the Canadian rapeseed harvest while in South East Asia palm oil production usually peaks in the fall. That will be a lot of oil for the market to digest in a short time!

Meanwhile spring crops in Canada suffered from drought in recent weeks, and forecasts for relative weather improvements in early August have yet to bring relief. In eastern EU and the Black Sea region, dry and hot conditions remain a problem and the sunflower crop potential is deteriorating significantly. The weather in western EU finally showed significant improvement, but rain events continued to hamper crop and harvest progress, already well behind schedule. 



In spite of escalating geopolitical tensions in the Middle East, Brent petroleum futures dropped below $80/barrel to their lowest level since January as a slowing economy reduces demand. A global economic slowdown is being felt everywhere causing a drop in petroleum prices, in particular on uncertainties about the Chinese economy. This too is weighing on oilseed prices, part of which are used to make biodiesel. But if Middle East troubles spread, the market may quickly reinstate a risk premium on prices, which could have a direct upward impact on prices of agricultural products.

Economists in the US who had been urging interest rate cuts are now concerned that it might be too late to prevent a recession. Consumers are struggling, and the labor market is weakening, as evidenced by a surge in unemployment claims. Weak manufacturing data and weak new orders suggest that economic activity will continue to deteriorate in the coming quarters. Worries about a recession intensified, leading to a significant selloff in global equity markets last week and a chase for safer government bonds and gold.

In the Eurozone, 2nd quarter GDP growth exceeded expectations, with a quarter-on-quarter growth of 0.3%, indicating a begin of recovery after stagnation in 2023. However, the overall economic outlook for the Eurozone remains uncertain as both manufacturing and service sectors show signs of slowing down. Different countries within the Eurozone have varying performances, with Germany experiencing a decline in GDP, making it the weakest link. Apart from Spain, the rest of the Eurozone didn’t perform exceptionally well either. Weak manufacturing and low order inflows contributed to a dimmed start of the 3rd quarter. Exports of goods and services make up about 50% of GDP in the Eurozone, making EU more exposed to the global economy compared to the US, where exports account for only 10% of GDP.



Markets


Palm oil


Palm oil prices rose mid-July, in response to very strong export volumes from Malaysia since the beginning of July. But spillover weakness from mainly soybean oil and concerns about rising palm oil production did counterbalance somewhat the optimism around those robust exports. Nevertheless end-of-month stocks are expected to stay way below 2Mmt which is considered low for the time of year. The official release of the Malaysian palm oil industry performance report for July is due by August 12th and can serve as further guidance for price development. The outlook for increased production from Indonesia and Malaysia over the coming weeks hovers over the market but palm oil prices will continue to undergo what other markets are doing and price spreads may further narrow.



Soybean oil

American soybean export sales, sparked by low prices, looked reassuring last week, but the prospect of less Chinese demand and favorable weather weigh on bean prices. Good rains spread over soybean-producing states and short and measured heat spikes avoided the risks of major deterioration. Crop Progress reports showed 77% of the acreage is blooming and 44% is setting pods, which is faster than the 5-year average. The crop (yields) looks big.

The market assumed that export demand for US beans would recover and that China would become a bigger buyer, but China covered its needs mostly in South America and that is likely to continue. Having said that, there are only so much beans in the whole world and one way or the other they will all go to market and that doesn’t have to be in China. Beans will flow where the money flows!


The question now is if all bearish elements are already priced in. Managed money still added contracts to their net short and holds huge short positions; for beans in excess of 200.000 contracts. And the new crop is just around the corner….

A further negative for soybean oil in the US was a recent court ruling which allows smaller petroleum refineries to bypass biofuel blending mandates imposed by the “Renewable Fuels Standard”. In EU soybean oil may be less available due to crushing and refinery capacity constraints till the end of the year; not to mention eventual hurdles from the EUDR implementation (deforestation rules).


Rapeseed oil

Rapeseed prices initially increased on concerns about adverse weather conditions in Canada but later corrected.

The Canadian Prairies experienced a sudden increase in heat and dryness and while the region had one of the best starts to the season in years, growing conditions are rapidly deteriorating. But the market doesn’t appear to be overly concerned (yet) as the dryness and heat are not expected to reach extreme levels for the remainder of the growing season and possible timely rains could still limit the damage. Nevertheless, production is unlikely to reach previously expected levels. The next few weeks will be critical. Heat stress during the flowering stage could hamper pod development and yields, and cause Canadian rapeseed futures to soar, after the amazing recent sell off caused by pressure from the fast-approaching new soy and rapeseed crops.

In EU, rapeseed prices fell on the drop of soybean and Canadian rapeseed futures, despite worsening crop estimates in EU and Canada. As the harvest goes on, reduced production estimates get confirmed, following earlier excessive rainfall in the west and hot and dry conditions in the east of EU. Seed demand remains low versus limited selling pressure due to harvest delays and disappointing yields. MATIF rapeseed futures last Friday settled at € 462/mt for the August 24 position, November 24 settled at €472.25.


Generally, food demand for rapeseed oil has been quite good while demand from biodiesel producers remained depressed. About 60% of rapeseed oil produced in EU is used for domestic biodiesel production; so, food demand has less impact on pricing. But Hans Van Duyvenbode always said: “every kilo needs to be sold and something is supposed to be earned on every kilo”.


Sunflower seed oil

Rising temperatures and dryness in Eastern Europe and the Black Sea Region threaten the sunflower seed crop. This increases tension across the entire oilseed complex as sunflower production estimates were lowered once again. Meaning the total global supply of all oilseeds/oil will decrease.

In Ukraine and Russia, the weather improved a bit and the harvest is just a month away. Soybean oil prices are low and price buyers already switched away from sun to cheaper alternatives. Sunflower seed oil prices therefore turned less proud. This is certainly not a bear market but eventually the oil will need to find a home and usually markets go lower to discover the price that will find new demand and eliminate excess inventory.


Linseed oil

Some time ago some turmoil emerged on uncertainty around availability and prices of linseed following the introduction of gradually increasing import duties on Russian oilseeds. At a certain point linseed oil commanded a premium of around €275 over rapeseed oil. As a consequence, the market adapted quickly and e.g. usage of rapeseed oil in fish feed (for energy and as omega-3 source) increased while usage of linseed oil decreased. Prices already corrected somewhat as bull markets rise until the price rations demand and/or enough has been produced.


Olive oil

If weather keeps cooperating there is a considerable and growing chance of a very good crop recovery this year, around the mediterranean (except maybe Italy), and by the end of the year prices of olive oil may come under further downward pressure.



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Disclaimer

Unless otherwise mentioned the crude oil values quoted in these documents are prices landed in EU without import duties, handling, storage, financing, refining, packing, transport or any other cost related to bring the product to market. They are used as market trend illustration. Substitution of oils is possible but different oils have different fatty acid profiles and are not all interchangeable for all applications. One can make biodiesel from all oils and fats but one cannot make mayonnaise from coconut oil. This document is exclusively for you and does not carry any right of publication or disclosure. This document or any of its contents may not be distributed, reproduced, or used for any other purpose without the prior written consent of AVENO. The information reflects prevailing market conditions and our present judgement, which may be subject to change. It is based on public information and opinions which come from sources believed to be reliable; however, AVENO doesn’t guarantee the correctness or completeness. This document does not constitute an offer, invitation, or recommendation and may not be understood, as an advice. This document is one of a series of publications undertaken by AVENO and aims at informing broadly a targeted audience about the edible oils & fats market. AVENO’s goal is to keep this information timely and accurate however AVENO accepts no responsibility or liability whatsoever with regard to the given information.























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