Analyst bullish about veg oil prices

Rising biodiesel mandates around the world start to shrink global supplies of vegetable oil, forcing prices higher

Oilseed prices are languishing but there are signs of life with vegetable oil prices.

“I think this is a long-term bullish play,” said Terry Reilly, senior commodity analyst with Futures International LLC.

Rising biodiesel mandates in various markets around the world are starting to shrink global supplies of vegetable oil, forcing prices higher.

Brazil recently moved to a B10 mandate requiring 10 percent biodiesel content in its diesel fuel supplies, up from seven percent in 2016.

Indonesia intends to implement a B30 mandate in 2020, up from B20.

The European Union is on track to meeting its target for 10 percent renewable energy use in transport fuels by 2020.

Those are a few examples of the surging demand for vegetable oil in fuel and food markets.

“We’re starting to see global veg oil inventories decline given all the increases in mandates across the globe for making biodiesel,” said Reilly.

The U.S. Department of Agriculture forecasts world vegetable oil ending stocks of 20.84 million tonnes in 2019-20, down from 21.66 million tonnes the previous year and 22.07 million tonnes the year before that.

Reilly said that should help underpin canola prices because canola is such a high oil content crop that it is heavily influenced by vegetable oil prices.

Brian Comeault, market analyst with Cargill, said that is true in a normal year. But this is far from a normal year.

He estimated Canadian canola carryout will be a record four million tonnes or higher, with an estimated three million tonnes of that stored in farmers’ bins.

“That’s a big warning on the canola side,” he said.

The other bearish factor is the forecast for 21.6 million tonnes of U.S. soybean ending stocks, the second highest on record. That is due to the ongoing trade spat between the U.S. and China and reduced hog feeding in China due to African swine fever.

“That probably puts pressure on canola more than anything,” said Comeault.

But he is encouraged by the USDA’s forecast of 658,000 tonnes of U.S. soybean oil ending stocks in 2019. Stocks have only been lower than that once in the last 15 years.

Comeault said that is the result of a slowdown in U.S. crush as soybean meal futures plunge.

That is adding strength to soybean oil futures prices.

“It’s not going gangbusters or anything, it’s just grinding off the lows,” he said.

Another positive development for the vegetable oil complex is that Oil World is reporting India’s vegetable oil stocks were 2.15 million tonnes at the end of June, which is a five-year low.

Oil World forecasts a “pronounced increase” in veg oil imports from India between July and September 2019.

Reuters reports that monsoon rains have been dismal in India’s main oilseed-producing states.

Reuters quotes a seasoned oilseed trader named Govindbhai Patel, who forecasts 16.1 million tonnes of Indian edible oil imports in 2019-20, up 7.3 percent from the previous year.

Oil World also reported that tight rapeseed supplies in China are boosting rapeseed/canola oil imports in China. Statistics out of China back that up, showing 250,000 tonnes of rapeseed oil imports in June, which is more than double the usual volume for that month.

A positive development in the otherwise depressed canola seed market is that Europe’s rapeseed crop is in trouble due to a second heat wave across western and northern portions of the EU that pushed temperatures well above normal.

“It is under considerable stress from hot and dry weather,” said Reilly.

The European Commission recently reduced its EU rapeseed harvest estimate to 18 million tonnes from 18.7 million tonnes. Oil World believes it will be closer to 17.5 million tonnes.

That is down from 20.1 million tonnes last year and 22.2 million tonnes the year before that.

“That is causing a little bit of a stir and a frenzy of European end users trying to source oilseeds from other areas,” said Reilly.

Oil World forecasts the EU will import a record 5.6 million tonnes of rapeseed/canola in 2019-20, up from 4.3 million tonnes last year.

The spread between November Paris rapeseed and Canadian canola futures prices has more than doubled to $79.25 per ton as of July 25, from $38.50 per ton on Feb. 22.

That bodes well for Canadian canola exports.

Reilly said there are also reports of weather problems in Ukraine reducing rapeseed production in that important exporting nation.

That contradicts a report by the APK-Inform agriculture consultancy forecasting 3.58 million tonnes of Ukrainian rapeseed production, up from 2.84 million tonnes in 2018.

APK-Inform also says Russia’s ministry of agriculture is forecasting this year’s Russian rapeseed harvest will not be lower than last year’s 1.99 million tonnes.

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