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Palm Oil is the tightest since at least 201 Over the
past 10 years, palm oil has increased its importance in global
vegetable markets. In 2004/05 palm oil overtook soybean oil as the
world's largest produced oil. Since then, palm oil has continued to
grow, outperforming the growth of alternative oils, so much so that
palm oil production is now larger than the combined production of
all other oils excluding soybean oil.
Palm Oil is the tightest since at least 2011
Over the past 10 years, palm oil has increased its importance in
global vegetable markets. In 2004/05 palm oil overtook soybean oil
as the world's largest produced oil. Since then, palm oil has
continued to grow, outperforming the growth of alternative oils, so
much so that palm oil production is now larger than the combined
production of all other oils excluding soybean oil.
This growth has seen soybean oil ceding leadership of global
vegetable oil markets to Southeast Asia's palm oil. This has become
especially important as palm oil is extremely tight right now.
Focusing on Malaysia, as reliable data unbiased is absent from
Indonesia, stocks are arguably the tightest since at least
2011/12.
This creates a bullish situation for palm oil and has pulled
soybean oil with it. Ordinarily, in a tight situation like this the
solution would be for palm oil prices to rally in an effort to
shrink the discount to soybean oil, encouraging end users to switch
to soy oil, which historically is the higher priced oil. This would
encourage a greater crushing of soybeans to accommodate the
increased demand for soy oil. However, the situation that exists in
soybeans, the world's largest oilseed, makes this very difficult.
Solving the tightness in vegetable oils due to tight palm oil would
only make the soybean situation worse.
US Soybean Oil is pricing itself out of the world market. It is
more valuable in US motor fuels than in vegetable oil world trade.
This is also pulls Argentine Soybean Oil higher.
This is likely to keep palm exports stronger than normal as
price sensitive buyers move to Palm instead of Soybean Oil.
What about other oils?
There clearly is a role for other oils to fill in the void, but
it is only marginal. When one combines the production of
rapeseed/canola, sunflower, cottonseed, coconut, peanut, palm
kernel and olive oil they do not add up to as much volume as palm
oil alone. Additionally, the production of the second and third
largest oilseeds, rapeseed/canola and sunflower, were challenged
this year due to adverse growing conditions in the major producers
of the EU and Ukraine.
How does this get resolved?
Higher prices and tighter calendar spreads are needed to reduce
consumption and defer consumption to a future period. What price
accomplishes the job is hard to know in such an unprecedented
situation. Moreover, the difficulty comes in as vegetable oils are
used in nearly all food preparation, making reductions in
consumption very difficult. It is much easier when only one oil or
oilseed is tight. All is needed is switching from on to another.
However, in this situation one needs an overall slowdown in
vegetable oil consumption. Moreover, biodiesel, the second largest
use category, has become an integral part of the global motor fuels
complex.
Underlying Pressures
California renewable diesel
policy
Making commitments to reduce carbon in California's motor fuels.
Renewable diesel just becomes the most readily attractive way to
met the carbon reduction goals. In this policy California is
committing to reduce the carbon intensity of their fuels by 20% by
2030. With vegetable oils playing a large part in the compound to
create renewable diesel it creates an increase in demand. With the
whole of Canada set to implement its own Low Carbon Fuel Standard
policy and states such as Illinois, Pennsylvania, New York and
Massachusetts all having proposed measures, this is anticipated to
add to further demand upon vegetable oils.
Chinese increased demand for feed
China is again becoming increasingly active in the world trade
of feeds due largely to the recovery of their hog heard from
African Swine Fever (ASF) that previously devastated their hog
heard, reducing their numbers by 30% at its worst by most accounts.
With China producing nearly 50% of the world's pork, ASF had
reduced world pork production by 15%.
The recovery is well underway with 2021 Q1 data showing pork
production was up 32% YoY. This has caused a surge of imports of
feeds helping prices to rally. Given that soybeans are an integral
component in any animal protein production whilst also being an
important oilseed this rally within soybeans creates upward
momentum in vegetable oils
Malaysia migrant labour shortage
Production of Malaysian Palm Oil continues to underperform. A
resurgence of Covid-19 as Malaysia battles a third wave of
infections has meant measures to migitage infections have ensured a
labour shortage of approx 32,000 people. With the bulk of migrate
workers coming from India, Bangladesh and Indonesia government
travel restrictions have prevented an influx of labour. January-May
production is 6% smaller YoY.
