China’s vegetable oil stocks on the decline

The significant decrease could help canola prices, but analysts warn producers not to expect too big of a jump

Rapidly declining vegetable oil stocks in China could eventually lead to a canola rally but don’t expect a big price pop, say analysts.

The United States Department of Agriculture is forecasting 1.46 million tonnes of rapeseed, soybean and palm oil stocks in China at the end of 2019-20.

That would be a 69 percent reduction from 2015-16 levels.

Rapeseed oil is forecast to experience the biggest decline over that period, falling to 858,000 tonnes from about 3.75 million tonnes.

“As domestic oil production remains flat and stocks shrink, imports are likely to become even more critical to China’s vegetable oil supply,” the USDA said in its Nov. 8 Oilseeds: World Markets and Trade report.

Errol Anderson, analyst with ProMarket Wire, said canola growers need outside help to revive the moribund canola futures market.

“The market could be definitely setting up for more of a vegetable oil rally than anything to do with the raw seed,” he said.

But he doesn’t think that will happen for a few months until ample canola supplies start to dwindle.

“We could see a vegetable oil rally into the spring market,” said Anderson.

Derek Squair, president of Exceed Grain Marketing, agrees with Anderson’s assessment.

“I don’t expect any major increase in value, especially in the short-term,” he said.

There is plenty of canola supply in Western Canada and lackluster demand for the crop in export markets due to China banning shipments from Richardson International and Viterra.

However, China is still buying plenty of canola oil from Canada. It purchased 586,591 tonnes through the first eight months of 2019.

That compares to 1.16 million tonnes for all of 2018, 688,599 tonnes in 2017 and 607,589 tonnes in 2016.

Canadian Grain Commission statistics indicate there will be robust demand from Canadian crushers in 2019-20.

Domestic use of canola through week 14 is 2.9 million tonnes, a 28 percent increase over the previous year.

Squair said that is a surprisingly impressive surge in demand from domestic crushers. He was expecting something more like 15 to 20 percent.

“There are good crush margins, so (crushers) are going to be as aggressive as they can and maximize any capacity they have,” he said.

The ICE nearby canola crush margin is close to $100 per tonne, which is double last year’s levels.

At the current pace, domestic use would be 10.77 million tonnes for the full year, slightly more than one million tonnes more than Agriculture Canada is forecasting.

Canadian crushers aren’t the only ones taking advantage of the growing opportunity for canola oil sales to China.

Canadian canola seed sales to the United Arab Emirates are 168,500 tonnes for the first two months of 2019-20, up from 18,400 tonnes a year ago.

That canola is getting crushed and most of the oil is being shipped to China.

Anderson said China’s vegetable oil shortage has contributed to rising soybean oil prices but he believes that market is topping out because it is oversold.

He described the entire oilseed complex as “a two-headed monster” right now as bullish factors such as China’s shrinking vegetable oil supplies are offset by bearish factors like the lingering trade war between the U.S. and China and the poor health of the world economy.

“There can be rallies but they won’t hold,” said Anderson.

And they won’t be big rallies. He believes China’s tightening vegetable oil stocks could eventually add maybe $15 per tonne to the March 2020 canola futures contract.

“I really hesitate above that because the world is not healthy,” he said.

Squair said another potential bullish factor for canola is the 2.3 million acres remaining to be harvested, much of which could be unusable by the time it comes off the fields.

“That could create some sort of supply shortage,” he said.

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