Palm trees graciously swaying in warm, gentle tropical breezes are an alluring image for farmers facing the prospect of another cold, snowy prairie winter.
But not for canola farmers.
For them, palm trees mean just one thing – low prices.
The world is awash in vegetable oil and one of the main reasons is record production and price-depressing inventories of palm oil.
Analysts say canola prices aren’t going to get any better until the palm oil market perks up.
“You really need help from palm oil,” said Greg Kostal of Sparks Companies Inc.
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Palm oil is the world’s number one traded vegetable oil. A combination of high stock levels and growing competition between the two
major exporters, Malaysia and Indonesia, has plunged markets into turmoil.
“Although it’s not something we as North Americans are very familiar with, it’s a product that is heavily traded into the Asian market and has a direct bearing on where vegetable oil markets are going,” said Mike Jubinville, analyst with Pro Farmer Canada.
Last week, Malaysian palm oil futures prices plunged to seven-year lows, driven down by a combination of high supplies and sluggish exports.
“Inventories are built up to very large levels and there’s some question on the demand side,” said Jubinville.
Palm trees happen to be in the peak of their production cycle, with palm oil output this year reaching a record 22 million tonnes, or about 25 percent of world vegetable oil production.
In response, Malaysia has brought in regulations to allow more exports, while Indonesia has taken steps to reduce export taxes to stimulate sales.
“They’ve been pushing palm oil on to an overburdened world vegetable oil market,” said Chris Beckman of Agriculture Canada’s market analysis branch.
Meanwhile, demand has been disrupted by a number of factors, including problems getting import licences into China. India, a major buyer of palm oil, is talking about imposing import duties on refined oil and instead buying crude oil. This has intensified competition between the two main exporters.
There have also been reports of Indian buyers defaulting on contracts for Malaysian oil, as current futures prices have dropped $50 a tonne below month-ago levels.
“Which Indian importer is going to take delivery when the market has fallen to such an extent?” a Singapore-based trader told Reuters News Agency.
“Where will he sell if he takes delivery of his consignment?”
All the bad news about palm oil is being exacerbated by an equally bearish impact from soyoil.
This year’s soyoil output is pegged at a record 25.5 million tonnes, South American soybean acreage is expected to be up and American farm programs will likely encourage increased plantings next spring.
All of these developments have prompted Agriculture Canada to lower its price outlook for canola, projecting a 2000-01 price of $270 a tonne (in-store Vancouver), down from $288 a tonne in the last crop year.
Jubinville said there will probably be a slight bounce in the market this fall or winter due to a weather or crop scare somewhere, and if farmers see a price anywhere around $6 a bushel, they’d be well advised to take it.
“The upsides are limited and farmers need to be selling on rallies,” he said. “I don’t see any sustained increase based on the fundamentals.”
