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Palm oil, soyoil prices - will they converge again in 2014?

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Vegetable oil prices had a mixed 2013.

Soyoil futures tumbled 21% in Chicago, under pressure from improved supplies after a better US soybean harvest in 2013, and with the forthcoming harvest expected to boost availability from South America too.

This was against a background of an improvement in global overall of vegetable oils overall, with output to rise by 8.0m tonnes to 168.9m tonnes in 2013-14, according to the US Department of Agriculture.

Palm oil managed to buck the trend, rising 9.1% over 2013, thanks to its own particular dynamics, with world output falling short of initial expectations, helping Malaysian inventories falling below 2m tonnes, and fostering a revival in Kuala Lumpur (MDEX) futures from their lowest since 2009.

That lowered significantly the discount of palm oil to soyoil. But can this trend continue? And how will soyoil prices fare against expectations of a further increase in US soybean output?

Bank of America Merrill Lynch

"US biodiesel production runs at about 100,000 barrels a day and has been rising strongly in the first half of 2013, and the source of input has predominately been soyoil.

"As soybean prices came down significantly from the year prior, from peaking at $17.50 a bushel in July 2012 to under $13.00 bushel currently, biodiesel production from soybeans ramped up.

"US biodiesel production from soyoil is growing rapidly, albeit from a low base, and we expect this trend to continue.

"This source of consumption growth will likely lend support to soybean prices near term, until news of new bumper soybean crops from significantly expanded acreage in first Latam and then perhaps the US hit the market."

Jefferies Bache

"Soyoil prices are nearing, but have not reached, the minimum retracement seen in the past 10 cycles, which would take prices of the nearby contract down to 36.36 cents a pound.

"There is history based on the recent cycles and common retracements that projects a low at our old, longstanding target of 34 cents. However, the current price cycle is very extended historically - based on the average monthly soyoil price at Decatur, this cycle has lasted for 57 months versus an… average of about 46 months

"There has been a pick-up in US soyoil exports in December. Usage of soyoil for methyl ester [biodiesel] has increased as well, reaching 551m pounds in October, but it may fall off sharply beginning this month with the expiration of the $1 a gallon blenders' tax credit.

"We do not yet see the fundamental catalyst to turn soyoil prices higher but we are on the lookout for an upturn. The extended bear market, the slowing price decline even in the face of bearish news, timing indicators and the fact that speculators are still heavily net short are all caution flags for bears.

"We do not see a sharp turn higher in soyoil prices, but rather a rounded bottom with a fairly modest price advance up to resistance at 42 cents a pound and possibly higher."

Morgan Stanley

"After a year in which strong soymeal prices drove the global soybean crush, soyoil prices should return to prominence in 2013-14.

"Strong soymeal prices and stiff competition from other vegetable oils pressured the oil share of global crushing revenues despite declining US inventories. However, we expect this trend to reverse as Argentine soymeal exports ease the call on US meal and rising demand tightens the global vegetable oil balance.

"Rising demand should keep soyoil stocks comparatively tight. Despite continued declines in US food consumption of soyoil, exacerbated by the FDA's recently-announced restrictions on trans fats, we see US soyoil demand rising 2% year on year, supported by rising US biodiesel production rates.

"Even as biodiesel production has ramped up in recent months, soyoil's share of the overall biodiesel feedstock continues rise. Soyoil accounted for 54% of US biodiesel production in August, the highest level since December 2011

"However, a push to produce ahead of the YE blending credit expiration may result in front-loaded 2013-14 US soyoil demand.

"China will likely continue to exert a pull on global soyoil supplies, though Argentina may prove a willing supplier. With Indonesia's proposed biodiesel mandate taking an increasing amount of palm oil off of the global market, we expect China's demand for soyoil to rally as much as 9% year on year."


"The overall oilseed market will remain bearish. Production of the major oilseeds is expected to increase by 24m tonnes in 2013-14 to 484m tonnes, increasing 5.4% year on year.

Rabobank forecasts for palm oil prices, 2014

Q1: 2,600 ringgit a tonne

Q2: 2,625 ringgit a tonne

Q3: 2,500 ringgit a tonne

Q4: 2,600 ringgit a tonne

Forecasts for quarter average, front MDEX futures contract

"The palm oil discount to soyoil will remain tight at $100-120 a tonne. The bearishness in the wider oilseed complex will drive the palm-soybean spread to below-historical levels.

"This reduction would lead to [palm oil] demand erosion to some extent as consumers find other oils relatively more affordable.

"Biodiesel demand is expected to be much stronger than in 2013. Indonesia has already rolled out a B10 (10% biodiesel in diesel] mandate, while Malaysia is considering implementing a B7 programme.

"Based on the mandate levels, the demand from these two countries could amount to more than 3m tonnes of additional demand for vegetable oil.

"Undoubtedly, biodiesel programmes are among the strongest bullish driver for palm prices in 2014, but delays in implementing these mandates… could dampen the impact."


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