CHICAGO (Reuters) — Production of the world’s top oilseeds will exceed demand by the largest margin ever in 2014-15, helping to push year-end stocks above 100 million tonnes for the first time.
The glut of major oilseeds, the input for protein meals and edible oils, has already driven oilseed prices to multi-year lows. It is widely expected to pressure prices of soybeans and other oilseeds for most of 2015.
This steep build in supplies has been well-chronicled. Yet traders have paid less attention to the demand side of the oilseed equation, and they could be in for a surprise in 2015 if consumption picks up faster than expected.
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The U.S. Department of Agriculture has penciled in a rise of roughly 3.8 percent in demand for the top oilseeds in 2014-15, slower than the expected 6.3 percent climb in production. But oilseed demand grew by 5.7 percent last year, and averaged more than five percent annually between 2009 and 2012, so there is risk that usage could steal the limelight from supply in 2015.
Global production of the most widely traded oilseeds, soybeans, palm kernel, canola and sunflower seed, has climbed by nearly 50 percent over the past decade thanks to large increases in planted area and yields of major crops such as soybeans.
Global production of those oilseeds grew at an average annual rate of nearly 5.5 percent from 2008 to 2014, despite back-to-back production problems in 2010-11 and 2011-12. Over the same period, world exports increased at an average annual rate of 6.8 percent as global markets developed.
Oilseed stocks increased by an annual average rate of 5.8 percent during the 2008-14 era, with several double-digit swings in both directions. Robust demand depleted inventories following poor growing seasons, while bumper crops speedily replenished them after good growing seasons.
Following robust production performances in consecutive years lately, oilseed stocks have climbed by their fastest clip ever, swelling by more than 22 percent last year. They are projected to climb a further 31 percent in 2014-15 as mammoth U.S. and South American soybean crops get gathered.
The projected 2014-15 total for soybeans, canola, sunflowerseed and palm kernel is just over 100 million tonnes, nearly 40 million tonnes larger than the 2011-12 total. The projection represents more than 88 days of use of those oilseeds.
As abundant as those inventories may appear, the resulting downward pressure on prices is whetting the appetite of end users, who tend to be slower to respond to production swings than others in the market. Still, there has been only one single instance of year-over-year demand contraction in 25 years.
What’s more, demand rates have tended to pick up at a faster rate than average in the immediate wake of production surges, as supply-led price pressure helps to improve end-user margins.
Total oilseed demand grew 5.7 percent last year, its fastest since 2009-10. For 2014-15, USDA expects consumption to grow at around 3.8 percent, which would be below the five-year average of 4.4 percent and close to 2 points below last year’s rate.
Benchmark oilseed prices such as soybean futures are trading at or near their lowest levels in four years and around 20-30 percent below where they were for most of 2013. It stands to reason that oilseed demand has the potential to grow at least as quickly as last year, if not at an even quicker rate.
And if the 2014-15 growth rate emerges at five percent rather than 3.8 percent, that would equate to an additional five million tonnes of oilseed usage. A growth rate of seven percent would mean close to 13 million tonnes of additional oilseed consumption.
With projected inventories seen at around 100 million tonnes, an extra five million tonnes of use may not seem significant. But any reversal in stocks momentum could boost market sentiment, which in turn could prompt more aggressive buying interest by consumers. This scenario could lift prices over the course of the year.
So while current focus in the oilseeds arena remains on the historic scale of global supplies, demand growth could well emerge as the main driver of market action in 2015 as consumers react en masse to the prevailing low prices.
