Oil prices set to rise for soy, canola

Expert predicts tight world stocks of vegetable oil will pressure prices for soy oil higher, which in turn will boost canola

Sean Pratt reports from the Oilseed & Grain Trade Summit in Minneapolis, Minn.

MINNEAPOLIS, Min. — Market analysts are bearish on most agricultural commodities, but one is definitely bullish on soy oil, which bodes well for canola.

Bill Lapp, president of Advanced Economic Solutions, said stocks of most agricultural commodities are rising, but that is not the case for world vegetable oil supplies.

The stocks-to-use ratio is forecast to plunge to 9.7 percent in 2016-17 from a recent high of 13.7 percent three years ago.

It’s happening at the same time that there is weak demand for U.S. soy meal. Meal exports are down 19 percent from last year.

Sluggish meal sales are slowing the soybean crush, which is pressuring soy oil prices higher.

“If you don’t crush the soybeans, you don’t get the oil,” he told delegates attending the 2016 Oilseed & Grain Trade Summit.

Meanwhile, there is a significant increase in soy oil demand from the U.S. biodiesel industry. The sector produced 2.49 billion gallons of fuel in 2016, a 37 percent increase from last year.

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“I think you’re kind of getting the picture I’m painting here, that it could be bullish soybean oil,” said Lapp.

Canola prices are more tied to soybean oil prices than soybean meal prices because of the high oil content of canola seed, so that is welcome news for Canada’s top crop.

Lapp said palm oil production is the big wild card.

“We expected palm oil to start to recover and it hasn’t this year, and stocks have gone to extraordinarily low levels,” he said.

Generally palm oil production has been down this year because of an El Nino drought in Indonesia and Malaysia.

There are few statistics from Indonesia, but Malaysian palm oil production in October was 18 percent less than a year ago. For the year it is down 16 percent.

Analysts and traders were counting on the palm oil production recovery when they created their supply and demand forecasts.

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“There’s some pretty big question marks about the big recovery that’s baked into all the numbers,” said Lapp.

He predicted the tightness in the world vegetable oil market will result in soy oil prices making a run to 40 cents per pound by the last half of next year.

Soy oil is selling for around 35 cents per pound today, up from 30 cents in August, so 40 cents would be quite the run-up.

“If palm oil production disappoints, it could be even higher,” said Lapp.

The tightness in the world vegetable oil market will have a price-boosting impact on canola, especially if the palm oil crop continues to falter.

“We could have a 20 percent rally in canola seed from current levels if that happens,” he said.

The rally in soy oil may take a while to develop because investment funds are long on soy oil, so prices may stay in the mid-30s range for a while.

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However, there could be a slight boost in prices when the new U.S. biodiesel mandates are announced Nov. 30 if they prove favourable.