Palm oil leads historic vegetable oil rally

Although palm oil production is predicted to rebound in 2022, prices are expected to remain elevated as output gains could struggle to keep pace with continued demand increases for vegoils in general, especially as pandemic restrictions ease.

WASHINGTON: Global vegetable oil supplies have tightened in the last couple of years even as the pandemic slowed the demand growth rate, and that has had the most profound price impact on palm oil, the most widely used vegetable oil.

Although palm oil production is predicted to rebound in 2022, prices are expected to remain elevated as output gains could struggle to keep pace with continued demand increases for vegoils in general, especially as pandemic restrictions ease.

Benchmark Malaysian palm oil futures hit lifetime highs on Monday, closing 60% higher than at the end of January 2021 and more than double the end-January 2020 price.

Last month’s gains alone totalled 19%.

Prices for all major vegetable oils, including soybean, rapeseed, and sunflowerseed, have skyrocketed since mid-2020, but palm oil has taken the brunt due to its cheaper nature and larger availability.

Palm oil’s surge has erased much of its traditional price advantage over other vegoils in recent months.

Weather and labour issues have led to slower growth in palm oil production this year, further straining inventories.

Major vegoil supplies relative to demand are seen at 14-year lows in 2021-22, and a comfortable restoration of stocks could be at least a couple of cycles away.

Near-term palm oil availability will likely worsen as top exporter Indonesia last week announced mandatory domestic sales to control prices, effectively curbing shipments and sending futures even higher.

That is bad news for countries like India, the top palm importer, which slashed import duties in October to deal with its own price inflation.

It also keeps pressure on competing vegoils, some of which should have a production comeback this year, especially rapeseed oil.

Among the four major global vegetable oils, palm oil accounts for about 63% of annual exports, soybean and sunflowerseed oil 15% each, and rapeseed oil 7%.

Soybean oil has a much larger share of the production pool with one-third, palm oil claims 40%, rapeseed oil 15% and sunoil 12%.

Demand chasing output

For the most part, global palm oil output reliably rises each year in response to demand, though any serious interruptions can be felt for years across all vegoils.

About 84% of the world’s palm oil production occurs in Indonesia and Malaysia, where tropical weather patterns can disrupt.

Early last decade, stocks-to-use for the four major vegoils were hovering around 11%, well above previous values.

But that changed in 2015-16, and stocks-to-use has not since returned to those prior levels.

El Nino, characterised by warmer-than-normal surface waters in the equatorial Pacific Ocean, developed in late 2014 and lingered until early 2016, reaching historic strength by late 2015.

El Nino can cause drought in South-East Asia, though sometimes effects on palm output lag due to the production process.

Back-to-back El Nino cycles caused 2015-16 global palm oil output to drop on the year for the first time since 1997-98, which also featured an epic El Nino and crop problems.

Despite the production skid, global consumption has risen each year since 1997-98, and recently, output has scrambled to keep up.

Over the last five years, annual palm oil production growth has averaged 3% versus demand expansion at 4%.

La Nina, El Nino’s cool-water cousin, has dominated for well over a year. It often brings beneficial rains to palm areas, though excessive rains have recently curbed production.

Weather is not the only problem for palm production of late, as the pandemic has led to a labour shortage and slower productivity.

Output slipped in 2019-20 and again a year later, though harvests are forecast to rebound in calendar-year 2022.

Palm oil production in Indonesia for 2022 was pegged on Friday by industry group Gapki at 49 million tonnes, up from 46.89 million in 2021 but identical to the year-ago 2021 outlook.

Malaysian production at 18.8 million tonnes would be up nearly 4% on the year.

End-2021 palm oil stocks in top exporter Indonesia fell 51% on the year. No. 2 Malaysia’s stocks were up 25% on the year but down 21% and 51% from the prior two and three years, respectively. Malaysia’s palm oil output in calendar-year 2021 was the lowest since 2007.

The two countries account for 90% of world exports.

Competing vegoils

According to predictions from the United States Department of Agriculture (USDA), stocks-to-use for the four major vegetable oils in the 2021-22 cycle will fall to a 14-year low of 8.1%. That compares with last year at 8.7% and a five-year average of 9.1%.

Last year’s tightening was led by sunflowerseed oil as production and exports were slashed in Ukraine, which accounts for half of global sunoil trade.

Sunoil stocks-to-use dropped to a 36-year low of 5.7% last year, but a small recovery is seen in 2021-22 after a record Ukrainian crop, assuming no export interruptions.

But stock thinning is expected for the other vegoils, especially soybean oil. USDA shows 2021-22 soyoil stocks to use at 5.7%, a 45-year low and down from 6% last year. Top exporter Argentina has not notably expanded output, especially when considering the growing consumption rate.

Most-actively traded Chicago soybean oil futures jumped nearly 15% in January after trading at record-high levels for the month, though they remain about 11% below the June 2021 record, set during heightened excitement for US renewable diesel prospects. Rapeseed oil exports in 2021-22 have been hammered by Canada’s disastrous canola crop, the smallest in 14 years, so recovery is a likely bet.

Top producer and consumer the European Union’s upcoming rapeseed crop is seen rising at least 7% this year after three seasons of sluggish output.

World rapeseed oil stocks-to-use in 2021-22 is projected at a 13-year low of 7.3%, down from 9.4% in the prior year and a five-year average near 10%. — Reuters

Karen Braun is a market analyst for Reuters. The views expressed here are the writer’s own.

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