(The author is a Reuters market analyst. The opinions expressed are his own.)
By Gavin Maguire
CHICAGO, Jan 29 – U.S. soybean oil prices may already be languishing at 3.5-year lows, but additional weakness may still unfold over the coming weeks as the record-large South American soy crop gets harvested to add to soy product supplies just as global inventories of alternative edible oils reaches its highest level ever.
U.S. soy crushing margins so far remain firm despite this wilt in oil values thanks to enduring strong demand for soybean meal. But soy processors should be concerned by any additional oil price losses as that would leave crushers more reliant than ever on meal prices for profitability just ahead of when U.S. meal exports tend to soften due to greater competition from other regions.
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EDIBLE OIL SUPPLIES HIT A RECORD
Oilseed growers around the world have enjoyed one of the most favorable growing seasons in years lately, and either have already harvested or are about to harvest record amounts of soybeans, rapeseed, palm and other crops in 2013-14 in both the Northern and Southern hemispheres.
This has resulted in total edible oil production totaling more than 169 million tonnes for 2013-14, up more than five percent from last year’s record 160.7 million tonnes.
The higher output total is expected to generate record demand as well, but that growth rate is expected to lag a touch behind the production increase and total just over 164 million tonnes.
As a result, edible oil stocks are expected to increase by more than 12 percent from a year ago to an all-time high of just over 20 million tonnes.
For U.S. soy processors, this rising trend in global edible oil output is nothing new, as world vegetable oil production has increased every year since 1990 to cater to the world’s growing demand for fats and oils.
What is new, however, is the record-low share of soybean oil of the overall edible oil production total, which is reflective of the growing prevalence of palm oil production as well as the record amounts of canola and sunflowerseed oil projected this year.
Also at a record is the ratio of “other” edible oils stocks to soybean oil stocks, which hit 4.82:1 this year from 4.16:1 last year. This means that there is more than 4.8 tonnes of other edible oils for every 1 tonne of soybean oil in stock in the world, presenting oil consumers with a rich variety of choices with it comes to vegetable oil selection.
This ratio is more than 8.25:1 in Asia, the top vegetable oil-consuming region, even though roughly 37 percent of the world’s total soybean oil reserves are located on that continent. Asian stocks of palm oil are close to 10 times larger than soy oil stocks, while canola stocks in Asia are double the size of soy inventories.
Given that Asia is the primary producer of palm oil, it is not unusual for that oil to take up a majority share of reserves in that region. But it is unusual for canola stocks to be greater than soyoil stocks in Asia – this year will be only the second time on record – and is indicative of the region’s oil processors, distributors and handlers seeking to diversify their offerings and cater to developing tastes.
The record level of those inventories of alternative oils also serves to increase the pressure on U.S. oil producers to find other homes for their produce outside of Asia.
OILSHARE AT HISTORIC LOWS
The pronounced climb in global edible oil reserves has served to apply pressure to nearly all vegetable oil prices. Canola values have been the hardest hit, dropping by close to 40 percent from year-ago levels due to the stellar production performance in Canada and elsewhere in 2013.
But soy oil is also down by roughly 30 percent, dropping to around 38 cents a pound currently from more than 52 cents at this point in 2013.
This spate of soy oil price weakness has had only limited impact on U.S. soy crushing margins to date because a majority of soy crushing profitability is currently stemming from the soybean meal market, which remains historically firm for this time of year due to robust demand from the livestock arena.
Indeed, the contribution of soybean oil to the current soybean margin is the lowest on record for this time of year, with only around 30 cents of every dollar earned stemming from oil sales and the remainder from soymeal sales.
And this reliance on soymeal for crush margin profitability is not necessarily all that alarming or unusual for the U.S. crushing industry, as soymeal traditionally is the prime motivator for crushing activity.
But with soyoil prices likely to weaken further over the coming weeks once the freshly harvested soy crop of South America streams through that region’s processors or heads overseas to Asia and other markets, U.S. soy crushers will likely see a further reduction in oil’s contribution to processing margins.
Further, this will likely unfold just as U.S. soymeal exports start to slow in response to higher meal offerings out of Argentina and elsewhere in South America.
U.S. soymeal exports hit a multi-year high last month amid overall strong demand for the protein feed. And additional interest in meal supplies can be expected at home and abroad over the near term amid continuing strength in the livestock markets.
Nonetheless, a steady decline in U.S. meal exports as the calendar year unfolds has defined the rhythm of the meal market for the past several years, and can be expected to do so again once South American growers wrap up their ongoing record harvest.
As this takes place once again, there is a risk that soymeal prices come under pressure from the resulting build up of domestic inventories, which in turn may eat into U.S. processing margins which up till now have remained robust across the country.
This in turn means that while the recent stretch of oil price weakness may not have seemed too important when compared to upbeat meal values, U.S. crushers may soon feel the sting of the relatively weak contribution of oil to processing margins once meal prices start to retreat.
