Vegetable oil prices are on the rise and that is supporting canola prices, say analysts.
Siegfried Falk, co-editor of Oil World, is forecasting a slowdown in the growth in the world production of vegetable oils in 2019-20.
Supplies are projected to grow by 3.8 million tonnes, down from 5.1 million tons the previous year and 10.3 million tonnes in 2017-18.
That is primarily due to a slowdown in palm and coconut oil production but also due to a forecast decline in global oilseed production, which will in turn curtail oilseed crushings.
At the same time, growth in oilseed demand is expected to be “unusually large,” expanding by 8.7 million tonnes in 2018-19.
That is being driven by “massive increases” in biodiesel production, primarily in Indonesia, Falk said in an email.
“Supplies will soon be insufficient to satisfy demand growth of this magnitude,” he said.
Oil World is forecasting a 1.4 million tonne deficit of vegetable oil supply compared to demand in 2019-20.
“This means vegetable oils will become more expensive relative to crude mineral oil to discourage the use in the energy sector. To some extent, demand growth in the food sector will also be slowed down by rising prices,” said Falk.
The last big shortfall was 5.9 million tonnes in 2015-16 when El Nino reduced palm oil production, leading to a rise in oil prices.
Palm oil prices have already appreciated 16 percent from their lows in July and other vegetable oils have followed.
“Prices will not continue to rise at this pace, given still relatively ample stocks,” he said.
“However, we consider it likely that vegetable oil prices continue to rise towards the end of the year and in the first half of 2020.”
Dave Reimann, market analyst with Cargill Canada, said another contributing factor in rising vegetable oil prices is the growing demand out of China as it restricts imports of U.S. soybeans and Canadian canola.
That has Canadian crushers running flat-out. They produced 373,755 tonnes of canola oil in July, compared to 379,276 tonnes in July 2108 and 385,406 tonnes in October 2017.
He said canola benefits from strong oil prices because it has 43 percent oil content compared to 18 percent for soybeans.
“It is definitely a supportive factor. I think the markets would have been down harder, much harder, if the veg oil side wasn’t doing as well as it has been over the last couple of months,” said Reimann.
Palm oil, which is one of the cheaper oils in the vegetable oil complex, sets the floor for oil prices, so when it is on the rise that bodes well for canola oil and seed prices.
Falk said the uplifting influence of the rising vegetable oil complex on canola will be somewhat muted by Canada’s political tussle with China.
China has blocked canola exports from Viterra and Richardson, which will create burdensome ending stocks of canola.
“Rising vegetable oil prices on the world market will therefore translate into an uptrend of canola prices only with a delay and by a limited extent,” he said.