Palm challenges could alter veg oil market

Dry weather in Brazil and forecasts for rising palm oil prices are providing modest support for the oilseed market.

Uncertainties about trade with China remain a wild card, but the fundamental supply and demand situation is shaping up better than it has been for a while.

Dry weather is shaving down Brazilian soybean forecasts. A Reuters poll of 10 analysts shows a survey average of 117 million tonnes, down from last year’s crop of about 120 million tonnes, even though acreage increased.

The outlooks ranged from 115.72 million to a high of 118.8 million tonnes. Back in November the average forecast was 120.8 million tonnes.

The Brazilian harvest is well ahead of average because of early planting and the dry weather. Current forecasts show a continuing dry trend in most Brazilian growing areas.

The situation in Argentina is almost a complete reversal. A large area has received too much rain, causing a larger than usual area of prevented planting. Argentina’s crop is planted later than Brazil’s and so forecasts are more tentative, but so far expectations are for a better crop than last year’s sharply reduced harvest.

Across the Pacific, palm oil production growth in the two dominant producers, Indonesia and Malaysia, looks set to slow, according to analysts. This should lead to a modest price recovery after setting lows last year due to overproduction.

Unlike field crops that are harvested once or twice a year, palm plantations produce year round. Malaysia’s industry is more mature and grows modestly, but Indonesia has been rapidly converting natural tropical forest into plantations. Over five years Indonesia’s annual production has increased about 26 percent to 41.5 million tonnes while Malaysia’s has risen three percent to 20.5 million tonnes.

Very strong production last year outstripped demand and stocks rose to record highs.

Production growth traditionally is weaker in the January to June period. Analysts believe growth will be weaker than normal this season because of reduced fertilizer application during last year’s weak oil prices.

Also, the trees will be recovering from the high production of last year.

A Reuters poll of analysts showed the average of guesses for Indonesian production in 2019 at 43 million tonnes, up one million from 2018. That compared to a 5.5 million tonne increase between 2017 and 2018.

Demand is expected to improve in export and domestic markets.

In September, Indonesia passed a law requiring all diesel to contain biodiesel from palm oil. Malaysia is expected to increase its biodiesel content in fuel.

However, the industry remains under intense scrutiny because of the toll it takes on the environment due to deforestation and land issues with indigenous people.

The European Union agreed in June to phase out the use of palm in transport fuel by 2030 as part of a review designed to make the renewable fuel supply more sustainable. France plans to eliminate palm from its transport fuel even sooner. Indonesia and Malaysia have responded with threats of a trade retaliation with the European bloc.

The EU is the second largest customer for imported palm oil after India. The EU imported about 6.5 million tonnes of palm oil in 2018. That equals 13 percent of global palm oil imports. Half of Europe’s palm imports go into biofuel.

Indonesia has a plan to address criticisms, limit plantation growth and reduce deforestation. It wants to help small landholders who manage 5.9 million acres to replant their trees with higher yielding seed stock.

Small producers in the country produce only 800,000 kilograms to 1.2 tonnes per acre a year compared to 4.85 tonnes per acre by Malaysia’s small producers.

However, the rollout of the program has been severely curtailed because of difficulties reaching the farmers, most of whom do not have access to modern communications technology.

The Indonesian government has restricted planting new areas, and if existing land is not replanted, production growth could be severely reduced because of lower yields from ageing trees.

It is hard to speculate how all this will play out and whether any particular oil type emerges a winner after all the rebalancing.

Much will depend on whether palm producers suffer permanent output limits.

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