Palm recovery weighs on oilseed price

The price of canola is determined by a host of factors.

The supply and demand of canola is a key determinant but so too the global supply and demand for other types of oilseeds, particularly soybeans and palm oil.

Currency fluctuations also work into the price. Canola prices are also affected by the markets for its processed products, meal and vegetable oil.

Given the fairly high level of oil in canola, developments in veg oil markets, such as palm oil production and biofuel policies, also play a role in pricing.

These two stories look at factors in the global veg oil market.

One of the world’s leading oil-seed analysts expects downward pressure on prices as world vegetable oil supply recovers in 2017-18.

In a Sept. 15 presentation at Globoil 2017 in Mumbai, India, Thomas Mielke, analyst with Oil World, said palm oil production is rising after a rough year in 2016.

Palm oil is a key driver of the world vegetable oil complex. Vegetable oil prices have a strong effect on canola because of its high oil content.

After falling sharply from last winter to this spring, palm prices have been climbing since July, but Mielke believes that is temporary.

Crude palm oil prices f.o.b. Indonesia were $727 per tonne as of Sept. 14, up $75 since early July.

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Palm production through 2016 was hurt by a drought associated with the El Nino of 2015-16, and that led to low stocks.

“The global production deficit of palm oil as well as of all vegetable oils was unprecedented in calendar year 2016, which resulted in a steep decline in stocks in the 12 months ending December 2016,” Mielke wrote in the presentation.

World stocks of palm oil were down 3.6 million tonnes from a year earlier as of the beginning of 2017. With the end of the drought, palm production was expected to rise in 2017 and cause prices to fall. The market did drop into the spring. However production did not recover as quickly as expected and prices held on much better than expected and actually staged a rally in late summer.

Factors that helped support the rally include continued strong demand, poor coverage by buyers and indications that production in September and October will be lower than anticipated.

Mielke was surprised by the magnitude of the price increases in August and September, but the good times may be coming to an end.

“I expect some downward adjustment in the near to medium term,” said Mielke.

“I would not be surprised to see palm oil prices in Southeast Asia and Europe to drop by $30 to $50 U.S. (per tonne) from the level registered on Sept. 14.”

That is because palm oil pro-duction is expected to recover in 2017 to 66.1 million tonnes, up from 59 million tonnes during last year’s drought.

Oil World forecasts a record 69.7 million tonnes of production in 2018, leading to a surplus of the product.

“Stocks will recover more or less sharply, and this could result in some downward pressure in palm oil prices in 2018,” he said.

Soybeans are another major player in the vegetable oil complex.

Mielke said South American soybean stocks were 15 million tonnes higher than a year ago as of the beginning of September.

It is unusually dry in parts of Brazil and unusually wet in Argentina, which could result in a five to seven million tonne reduction in production when the crop comes off in South America in early 2018. However, the United States is harvesting a bumper crop that will increase its stocks by 12 to 15 million tonnes by the end of 2017-18.

Global soybean stocks are expected to be ample at 97 to 100 million tonnes, rivalling last year’s record carry-out.

World soybean crush will have to rise by 12 million tonnes in 2017-18 to compensate for insufficient supply of other vegetable oils and to replenish soy oil stocks.

The huge soybean stockpile is offsetting tightness in world supplies of rapeseed and canola, which will remain tight in 2017-18 with a global crop of 63 to 64 million tonnes.

Some wild card factors that could affect the vegetable oil complex are a labour shortage in Indonesia, the potential for worsening weather conditions in South America and imports from important markets such as India, China and Pakistan.

“China in particular has a big problem in its domestic vegetable oil balance, mainly in respect to the domestic tightness in rapeseed oil and palm oil,” Mielke said.

“Higher imports and crushings of soybean can only partly moderate the vegetable oil shor-tage in China. The country will have to sizably step up imports of palm oil and soy oil.”

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