Takeoff under the lead of palm.

Past weeks most economic talk was about and around central banks lowering interest rates in an attempt to prevent a recession and prepare the field for a soft landing of the economies.

Amid signs of moderating inflation moving sustainably towards 2% and a weakening labor market, on September 12ththe ECB lowered interest rates with 25 basis points, on September 18 the FED boldly lowered rates with 50 basis points, then September 24th China lowered its rates and announced a stimulus package to revive economic growth, halt the housing market crash and push aside deflation. Across the globe, several more rate cuts are expected in the future, providing liquidity to the economy and financial markets.

Stock markets, prices of petroleum and other commodities firmed. And usually went interest rates tend to go down, managed money tends to invest more in commodities. It will be interesting to see if and when managed money starts to build long positions in agricultural commodities.

PALM OIL

Since mid-2022 palm oil futures have been moving mostly sideways, with some up or downward breakouts but staying close to 4000 Malaysian Ringgits/mt. Despite some headwinds the palm market has been developing some strength of its own and the development of unfavorable weather conditions in Southeast Asia helped a rapid surge in palm oil prices since mid-September. Last Friday, futures settled up at MYR 4200/mt!

The move may be overdone and prone to corrections but it seems we are also already moving into the low production cycle (?). Indonesian production and stock buildup keep disappointing and their plans to significantly increase domestic biodiesel production and consumption January onwards will leave less volume for export on global markets.

The palm oil market structure is in an inverse indicating no heavy stocks are weighing on the front end, and globally crude palm oil has grown more expensive than crude soy, rape, sun… time will tell how sustainable this is and if and how fast it can pull up the other oils.

After India, the world’s largest importer of vegetable oils, imposed a 20 per cent tax on all imported crude and refined edible oils to boost domestic prices and support their own farmers, the market perceived this as bearish but this effect faded quickly. Interesting is that India’s GDP growth is about 3 times that of China and Morgan Stanley recently said India had overtaken China in a global key MSCI equities index. A robust growing economy will continue to import its needs.

Soybean oil

A week ago on the 22nd of September, the US soybean harvest was 13% complete and with more beans coming to town one would suspect some harvest pressure on prices but last Friday bean futures closed higher for a sixth straight week, with the November contract at $10.65/bushel. October oil futures ended the week at $0.4218/lb.

The recent strength in the soy complex came from the mix of: end of quarter fund short covering. The weekly Commitment of Traders report showed soybean spec funds reducing their net short as of Tuesday, September 24 at 74,978 contracts; the market added a weather premium on the dry situation in Brazil where the first soybean sowings are hampered by very dry and hot weather; hopes for more demand after China announced an economic stimulus plan and on Chinese buying interest picking up in recent days; and last but not least: some fears of a shrinking US harvests and increasing palm oil and sunflower oil prices contributed too.

In the US, soybean oil got support last week when the bipartisan proposal “Farmer First Fuel Incentives Act” was introduced. A legislative effort putting US fuel producers, US crushers and US farmers first and wanting “American tax dollars to support American farmers – not imported feedstocks”. The American taxpayer-funded “45Z tax credit” (starting in January under the Inflation Reduction Act) should only apply to biofuels produced from domestic feedstocks by domestic fuel producers. But as always there were also forces that disapprove.

In EU, oil demand for biodiesel production is dwindling and the coming (unclear implementation of) EUDR rules makes sellers and buyers hesitate to move leading to a nearly market standstill. Probably more action will be seen in the soybean meal market with animal feed producers worrying about their future supply (EUDR).

Rapeseed oil

The rapeseed market benefited from the overall price increase in the oils and fats complex, following a recovery in Chinese and Indian demand and support from somewhat firmer petroleum prices, after the low of Sept. 10th, although economic woes kept petroleum prices capped.

Since the low of September 13th (€456.50), rapeseed futures rebounded significantly, to close last Wednesday on their highest since end July at €480/mt. But on Friday, November futures settled at €469.25/mt.

In Canada, rapeseed prices recovered from losses caused by the anti-dumping investigation launched by the Chinese authorities, on a very dynamic export activity since the beginning of harvest and a crop being revised downwards, to below expectations, as harvest went on (19Mmt?).

In EU, “Coceral” too reduced its 2024 harvest estimate by 1.4Mmt, to 17.1Mmt, compared to 20.1 Mt last year. And already the next crop is raising concerns with the return of rain and cool temperatures that are not favorable to winter rapeseed emergence. Rain and cold (Boris) in September led to long-lasting heavy storms and extended flooding in central EU impacting crops but still difficult to quantify. In Ukraine, heat and lack of rain delayed the planting of winter crops.

A negative on the demand side for rapeseed oil is that biodiesel margins turned negative which could weigh on the market till end of this year; something to watch as the last quarter unwinds.

Sunflower seed oil

Sunflower seed and sunflower oil prices continued to strengthen and have the potential to appreciate further as more downward crop revisions are expected. The harvest in Ukraine is near 70% complete and Russia about 25% and both show distressing yields per ha which doesn’t motivate farmers to sell. Additionally, a lower oil yield of the seed will further limit sun oil production.

While weather conditions in the western part of EU were reasonably favorable, summer crops in the central-southern and eastern parts of EU were negatively affected by heat and/or drought. So, sunflower yield expectations were again revised downwards across EU. In large parts of Romania, Bulgaria, Hungary, Slovakia and Austria, effects of hot conditions got worse by a persistent lack of rain. A long rainfall deficit also continued to spread across eastern Ukraine, southern Russia and Belarus, with negative consequences for sunflower grain filling. The Russian harvest is estimated at 17Mmt which is (on top of a significantly lower carry-out) 1.3Mmt less than last year. In Ukraine, seed production is now estimated at 12.59Mmt or 15% less than last year.

In EU-27 the average yield is estimated at 1.98 mt/ha or 6% less than in 2023. In France, sunflower production is estimated at 1.9Mmt, down 9.7% compared to 2023 (2.1Mmt), due to a decrease in both planted area (-4.0%) and yield (-6.0%). 

This is all very alarming and should be placed in a global context of rising edible oils and fats demand, including demand from biofuel producers. Oilseeds are mostly grown to produce oil to meet the rising global demand, and on a global scale the oil market is in short supply. So far, markets kept up with demand through palm oil, by far the most produced and most consumed oil in the world and which has the best oil yield per hectare, but that source is running out of steam and growth is stagnant. Next, markets turned more to oilseeds like rape- and sunflower which are now also nearing their limits. And we are now entering a year with less sunflower and rapeseed available for processing.

Then a global growing soybean acreage popped up. But as soybeans contain less oil, one has to crush nearly two and a half times as much beans to get the same amount of oil as when crushing rape. To meet demand, more crush is needed, making a lot of (cheaper) oil cake (meal for animal feed) available.

As both farmers and crushers need a decent margin, or they will stop producing, the oil price must therefore remain high enough to achieve that margin. In recent years sunflower oil was the oil that absorbed a growing global demand and the question arises: can sunflower oil continue in this function or will soybean oil take over and act as (cheaper) buffer to absorb additional demand?

Buying interest, from everywhere, including India, for oil, is increasing but sellers remain reluctant and as markets firm the spread between buying ideas and selling ideas kept growing. A Mexican standoff?