Bi weekly dd December 9th 2024.
Pessimism and optimism….
There has been optimism on soaring palm oil prices and some pessimism with stalling soybean prices lately.
The global edible oil market did regain strength on a seasonal and a La Niña-rains-related slowdown in palm oil production in Southeast Asia. But also, on Indonesia confirming it will increase its biodiesel mandates from B35 to B40, January onwards, and take the necessary steps (export tax increases) to ensure domestic supply meets domestic demand, leaving less oil for export.
Higher palm oil prices supported other edible oils prices, but the uncertain outlook for soybean oil in the US has limited the gains for these other oils. And the global uncertain economic and political situation and price volatility made many buyers reluctant to take positions, particularly given the very unusual wide spread between soybean oil and palm oil. But also, between soybean oil and sunflower oil. Not to mention the spread between gasoil and palm oil or soybean oil and others. When in doubt, stay away.
An upward or downward revaluation or price reshuffling of the entire edible oils and fats complex is always possible. This depends partly on unpredictable political decisions/biofuel policies and, of course, on market forces that could narrow the spreads between oils through product substitutions and through high prices killing demand.
Brent crude petroleum futures for February closed at $71.12/barrel last Friday, and over the past week, Brent prices dropped more than 2.5%, with many analysts predicting a supply glut next year due to weak global demand. This, despite OPEC+ delaying the start of production increases by three months to April and extending the full phase-out of voluntary production limitations by a year to the end of 2026. Also weighing on prices was a growing number of oil and gas rigs in production in the US, indicating a higher production from the world’s largest crude petroleum producer. A bit strange in view of a weak global demand, but that may be optimism gaining over pessimism.
Markets
PALM OIL
Palm oil was at the forefront with the rise in oil prices, in response to particularly unfavorable weather conditions in Southeast Asia which coincide with the seasonal slowdown in production in the region.
Heavy rains and floods hinder work on plantations, fruit bunches get wasted, the rains are not good for the oil quality either (may lead to lower refining yields) and on the other hand these normally occurring monsoon rains can have a long-term positive effect on palm oil production. This year’s “La Niña weather event” causes it to rain more than usual; but this had happened before.
Optimism for a Chinese economic recovery and higher Chinese demand also increased with gamblers betting on Beijing rolling out more measures to support a fragile economic recovery(?). But the underlying drive remains the increasing use of palm oil for Indonesian biodiesel production.
Thursday, ‘Crude palm oil February ’25 futures’ settled at MYR 5135/mt to drop only marginally on Friday when it stopped raining. This is near the high ground seen earlier in November but which, then, could not be held.
The market is getting torn between a concern of low production and low ending stocks and concerns over future demand. It will be interesting to see the “November performance data” of the industry from the Malaysian Palm Oil Board and how market reacts. Of fundamental importance is the evolution of monthly and yearly end stocks which in the end are the result of supply and demand!
Soybean oil
Soybeans recorded some gains in the past two weeks, with soybean oil once again a supportive factor. Soybean oil was greatly supported by the rebound of palm oil futures. A revised smaller Canadian rapeseed crop gave some support too. The Commitment of Traders report showed managed money removed 9,255 contracts from their ‘net soybean futures and options short’ as of December 3 (position at 72,217 contracts on Tuesday / and long oil). A lot of negative news seems priced in, including large ending stocks, election results and possible higher import tariffs. In Chicago, last Friday, Soybean Jan ‘25 futures closed at $9.93/bushel, Oil Jan ‘25 futures closed at $0.4297/lbs.
A delay in clear rules on the implementation of the 45Z tax credit for biofuels, in the US, is causing nervousness and pessimism. But also, for many US farmers, 2024 is the second or third year in a row with negative cash flow, which means ending the year in the red, unable to pay off operating loans and unable to get a loan to farm in 2025. With lower commodity prices and increased input costs causing tight margins, everyone in US agriculture is awaiting some “emergency relief for farmers”. The Farm Assistance and Revenue Mitigation Act, could subsidize farmers $101/acre for corn, $53 for soybeans, etc... but needs to be passed through Congress. This all means a whole supply chain is in the doldrums. See more below under Biofuels.
Soybean oil is the cheapest oil around and remained under pressure from an expected record crop in South America and a supply push from increased crushing around the globe. Increased exports of soybean oil from the US, Brazil, Argentina, Paraguay…., helped importing countries switch away from palm and sun. For instance, India, the biggest importer of edible oils in the world and biggest importer of palm oil, is maximizing the use of soy and minimizing palm and sun usage/imports.
Rapeseed oil
Rapeseed prices too benefited from the bullish turnaround in palm oil prices. “Rapeseed Feb ‘25 futures” in EU settled at €526/mt on Friday December 6th, marking the partial recovery of losses suffered two weeks ago.
A drop in Canadian rapeseed futures, after Donald Trump announced he would impose a 25% tariff on Canadian (and Mexican) products, corrected quickly after talks between Canada and the US to prevent a trade war from breaking out. But, as Canada is a major supplier of biodiesel and rapeseed oil for US biodiesel production and doubts remain about the outcome of US biofuel policies, prices have not fully recovered. Domestic demand in Canada is also stagnating, freeing up more export volume.
Noteworthy was StatsCanada, last week, reviewing the crop down by 1.1Mmt to 17.8Mmt on lower yields although several experts doubt this figure. The renewed competitiveness of Canadian rapeseed on the EU market, the import of Ukrainian rapeseed and the progress of the Australian harvests should allow for a more optimistic seed supply early next year. In Australia, the Australian Bureau of Agricultural and Resource Economics and Sciences raised its earlier crop estimate by 120 kt to 5.6Mmt vs. 6.1 last year.
However, much of the oil from imported seed is only suitable for making biodiesel and is not allowed to enter the EU food chain because it comes from (not-approved) genetically modified organisms. This means there is risk of a potential shortage of non-GM rapeseed oil in EU in coming months till August 2025! GM seeds are cheaper than non-gm seeds.
Sunflower seed oil
Prices came of the highs and eased somewhat because buyers looked for cheaper alternatives and found a lot of soybean oil. Also, Russia seems to have produced more than expected and is aggressively pushing oil in the export market. And also, Argentina came back in the game. But oil in EU is still at its highest level in about 2 years and the availability & price of seed remains a concern.
Biofuels
The US biofuels industry faces much uncertainty as it awaits guidance on a tax credit for sustainable aviation fuel (SAF) and other low-carbon biofuels. This would give farmers who supply corn and soybeans under the 45Z program (part of Bidens IRA -inflation reduction act) higher prices for crops grown using sustainable practices reducing the fuel’s lifecycle greenhouse gas emissions. The delay impacts both corn and soybean growers, who need to know under what conditions they can grow crops to produce eligible low-carbon fuel feedstocks. The entire supply chain needs clear rules to make critical feedstock decisions. Biofuel producers are now delaying or stopping production while waiting, which not only impacts current production but also hinders planning for future projects.The Advanced Biofuels Association (ABFA) too asked the government to issue guidelines for the clean fuel production tax credit and to extend blender credits to reduce delays and provide clarity for the industry. Urgent action is needed to release the credits by 2025 and to provide guidance on the 45Z tax credit by January 20, before the transition of power. But apparently the Biden administration said the EPA will not update policies until Trump takes office, so uncertainties may continue long into the new year…
Early December, Indonesia's Minister of Energy and Mineral Resources said Indonesia is preparing to build a $1.2 billion methanol production plant to support the implementation of higher biodiesel mandates, such as the B50 target by 2026 and thus requiring less fossil diesel imports. The new plant should help meet domestic methanol needs, to produce “palm methyl esters” or biodiesel. Until now the country has been 80% dependent on methanol imports.
With a production of about 48Mmt, out of a global production of about 80Mmt, Indonesia is the largest palm oil producer and also the largest exporter (25Mmt). At 35% palm oil biodiesel blending into diesel fuel, Indonesia had already become the world's largest biodiesel producer. An increase to B40 next year amounts to about 2Mmt less palm oil available for food, feed or other technical use.
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