A big rebound in vegetable oil production in 2021-22 will put downward pressure on prices, says an analyst.
That is bad news for canola, which is closely linked to the vegetable oil complex, particularly soybean oil.
Nagaraj Meda, managing director of Transgraph Consulting, said the U.S. Department of Agriculture is forecasting increased production of the four major types of vegetable oil in this crop year.
Palm oil production is expected to be up 3.09 million tonnes, sunflower oil by 2.6 million tonnes, soybean oil by 1.86 million tonnes and rapeseed/canola oil by 0.19 million tonnes.
That would be a total increase of 7.74 million tonnes over last year’s vegetable oil production.
Meanwhile, consumption of the four types of oil is forecast to be up 5.04 million tonnes, which would result in a 2.7 million tonne surplus.
That means vegetable oil prices are likely going to fall.
“Sunflower oil is the one that’s going to bring down the whole complex,” Meda told delegates attending a recent webinar hosted by the U.S. Soybean Export Council.
Excellent weather in Russia and Ukraine is expected to result in a massive rebound in world sunflower production.
He expects Ukrainian f.o.b. sunflower oil prices to fall to US$1,000 per tonne or 15 to 20 percent below today’s prices.
That would drag down Argentina’s soybean oil prices to around the same level, which amounts to about 45 cents per pound.
U.S. soybean oil is now fetching a 12 cents per lb. premium to Argentina’s soybean oil, with a spot price of 71 cents on July 13.
Meda believes the premium will eventually fall to five cents per lb. and the spot price will be closer to 50 cents per lb. or less by the final quarter of 2021.
That would not bode well for canola prices, said Errol Anderson, analyst with ProMarket Wire.
“If we go down to 50-cent oil, what does that translate to canola? Well, probably we’re going to head back down towards $700 a tonne on the futures,” he said.
Canola prices are extremely frothy, with the real possibility of November futures values topping $1,000 per tonne, said Anderson.
He suspects there are cash contracts that can’t get filled. There is an urgency to get those covered but farmers are refusing to sell due to prolonged stretches of excessive heat that is hurting yield potential in the Canadian Prairies.
Anderson said the market is full of angst, causing price volatility, but it can swing either way.
“There’s so much emotion in the market that we’ll go too high and then we’ll probably at some point go too low,” he said.
Meda noted the USDA is still forecasting 20 million tonnes of Canadian canola production, while the trade believes it will be closer to 18.5 million tonnes due to drought.
Anderson thinks it could easily be one million tonnes below that, which is the reason prices are so high now.
But if Meda is right about where soybean oil values are heading, the pendulum could soon swing back in the other direction.