There is potential for strong canola yields this year if the weather holds and the same can be said of United States soybean yields and yet oilseed futures edged a little higher last week.
The most obvious reason for the modest price strength was the strong export sales of U.S. soybeans to China during the week and the hope that the country will move closer to meeting its purchasing commitments under the Phase One trade deal, even as frictions are again increasing between the administration of U.S. President Donald Trump and Beijing.
Canola exports and domestic use are also strong.
Other factors also support oilseed values, including recovering palm oil and crude oil prices, but hope for further rallies in palm and crude are limited.
Back in January it appeared tighter palm oil supplies would be a major support to vegetable oil crops prices through the year. Dry conditions in the previous months, reduced fertilizer use and a slowing pace of plantation tree renewals would limit production gains.
But then COVID-19 hit, slashing demand, upsetting supply lines and staggering the global economy. That took a toll on palm prices, as did a diplomatic spat between Malaysia and India and the plunge in petroleum oil prices.
But now global economic activity is starting to recover, Malaysia has a new government that healed its relationship with India, allowing trade to resume, and crude oil values have partly recovered.
And production in Indonesia was temporarily hurt by flooding in parts of the country.
The Malaysian palm price, in local currency, peaked in January at more than 3,000 ringgits, fell to about 2,000 in early May and has now recovered to 2,700.
The price was further supported last week by Malaysian producers’ complaints about a lack of low cost labour to harvest crops because workers from Bangladesh and Indonesia are kept in their home countries due to COVID travel restrictions.
But the price upside is still limited by economic uncertainties from COVID that depress palm demand. Indeed, even though the usual production growth is stalled, weak demand means stocks are growing.
Indonesia has a B30 palm-based biodiesel mandate but reduced travel during the pandemic is limiting fuel use and Malaysia has delayed its planned move to a B20 mandate.
Palm prices are also influenced by petroleum values, as are vegetable oils generally.
Crude’s price has partly recovered from the pandemic crash but remains well below its 2019 average, and as world economies continue to struggle against the uncertainties of the pandemic few expect much further price recovery before 2021.
COVID’s negative effect on the global economy and the oil price war between Saudi Arabia and Russia in March hammered crude prices lower, famously falling below zero on April 20 as producers ran out of space to store the overproduction.
But the two recognized their folly and they, along with the rest of OPEC, agreed to reinstate production restrictions in April, cutting back by 9.7 million barrels per day. The collapse in prices also reduced oil production in Canada and the United States.
The combination of the reduced production and rebounding demand as economies around the world began to reopen in May and June helped oil prices partially recover.
The OPEC-Russia production cutback agreement expires at the end of the month and the parties agreed July 15 to moderate the restrictions to 7.7 million bpd August through December, from 9.7 in the last few months.
The Brent oil benchmark climbed back a little above US$40 a barrel by the beginning of July and edged up to about $43 by the close of trade July 24.
The future of crude prices will depend on whether countries can continue to reopen their economies or will be forced by new COVID outbreaks to scale back activity again.
The U.S. Energy Information Administration this month forecast Brent crude would continue to average around $41 per barrel for the rest of this year and then climb to average $50 in 2021. Brent traded above $60 per barrel through most of 2019.
The take home message in all of this is that while the bounce back in palm and crude oil prices reinforced the June-July rally in oilseed values, prospects for further support in the next few months are not good.
Palm and crude look like they have hit a plateau that will be difficult to break free from until COVID is corralled by a vaccine and economies recover to their pre-pandemic level.