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Morning markets: Palm oil futures hit two-year top, as supply concerns mount

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Palm oil bulls are keeping the pedal to the metal.

 

The vegetable oil for February delivery added a further 2.5% to 2,688 ringgit a tonne in Kuala Lumpur as of 10:05 UK time (04:05 Chicago time), arlier notching up a two-year high of 2,699 ringgit a tonne on a benchmark contract basis.

 

That took above 8% palm’s gains for November – following on from a 16% jump last month which made it the best performing of major ags.

 

This after the best-traded January palm oil futures contract closed up 2.9% at a fresh contract closing high of 5,568 yuan a tonne on China’s Dalian exchange, now up more than 6% for this month.

 

‘Set for higher prices’

Prices in China, as a major palm oil importer, are closely watched in other markets.

 

Indeed, with Malaysia saying on Tuesday that it intends to implement by early 2020 its roll out of B20 – a 20% blend of biodiesel, which is made from vegetable oils, in transport diesel – and also moves to hang on to European Union demand, rivalry between users is bubbling up.

 

Indonesia after all is aiming to introduce B30 from next year.

 

This when production expectations have been curtailed by haze in the main South East Asian growing region, and the hangover from a dent to fertilizer use from the weak palm oil prices that have reigned for most of this year.

 

“Overall, you are getting fairly limited production growth at best,” James Fry at LMC International.

 

“On the supply-demand side, it’s tipping towards a deficit,” he told Reuters adding, that “we are set for higher prices”, restating an estimate of Rotterdam palm values climbing to more than $700 a tonne in the first quarter of 2020, up from a current $675 a tonne.

 

‘Tax credit could come back’

As might be expected, the headway in palm oil fostered gains in rival soyoil too, which added 1.2% to 31.34 cents a pound in Chicago for December delivery – although, it has to be said, staying well below multi-year highs.

 

(The same went earlier for Dalian soyoil which, for January, ended up 1.5% at 6,366 yuan a tonne, but remains well below a contract high.

 

For November so far it has added 1.8% so far, meaning its premium over palm oil has tumbled by 21% to 798 yuan per tonne, January basis.)

 

Terry Reilly at Futures International also noted “renewed ideas the US biodiesel tax credit could come back”, a boost to production of the biofuel in the US, where soyoil is the default feedstock.

 

‘Not a reason to rally’

However, soybeans themselves managed only limited headway, of 0.3% to $9.14 ½ a bushel, for the Chicago January contract, although this was enough to take the contract back above its 100-day moving average.

 

On the downside, “South American weather is viewed as favourable with active rain patterns and little in the way of extreme heat slated for northern and central Brazil,” said Benson Quinn Commodities.

 

“The current forecast for Argentina has active rain patterns into the first week of December.

 

“There is not a reason to rally corn or beans based on South American weather at this time.”

 

That said, respected analyst Michael Cordonnier has trimmed his forecast for Brazil’s 2019-20 soybean harvest by 500,000 tonnes to 123.0m tonnes, and for Argentina’s by 1.0m tonnes to 54.0m tonnes.

 

‘Crush margins have improved’

Also on the downside for prices, the mood remained “deal-off” – ie with doubts about an imminent China-US trade agreement, with a reported reluctance by the US to roll back import tariffs.

 

The renminbi slid 0.2%, entrenching its return back above 7 per $1, while Hong Kong and Shanghai shares both shed 0.8%.

 

Still, as Karl Setzer at Agrivisor noted, at least sentiment remains upbeat on the US soybean crush, after industry group Nopa’s bumper data for October.

 

“Trade is starting to question the soybean crush volume that was predicted in the [USDA’s] November Wasde report,” which was downgraded.

 

“Soybean crush margins have improved in recent weeks though, and the Nopa usage number for October was a record.

 

“This would indicate the USDA may have been premature in lowering its crush estimate, and we could easily see an increase in future balance sheet reports.

 

‘Best chance since spring’

Furthermore, there remains a bit more optimism over US exports of the oilseed, and grains too.

 

“The idea that the US corn, soybean and hard red winter wheat offers are more competitive is real,” said Benson Quinn Commodities, if adding that “much of this is based on the fact that Argentine offers have been pulled as supplies dwindle ahead of new crop harvest.

 

“Brazil’s new crop bean offer firmed in the February slot.

 

“The US is looking for an opportunity to sell product, this is the best chance it has had since spring.”

 

New business, or normal demand?

However, corn futures failed to find further traction, despite some US export successes already announced by the USDA this week.

 

ADM Investor Services said that the “market is still not sure if this is normal business or new demand”, although it noted “talk that US corn export prices are competitive to world buyers”.

 

Tobin Gorey at Commonwealth Bank of Australia said that he suspected that the latest US export sales announcements will not ignite a rally,” but “will give support corn prices near current levels while the market looks for more signs of accelerating US exports”.

 

Chicago corn for December lost 0.4% to $3.68 ½ a bushel.

 

‘Not competitive yet’

Chicago soft red winter wheat eased too, by 0.3% to $5.13 ¾ a bushel for January, despite more of the evidence of importer interest which was credited with helping prices rise this week up to now.

 

Syria unveiled a tender for 150,000 tonnes of wheat, although from Russia.

 

More encouragingly for bulls, export supplies from Argentina, where harvest is in progress, “do not seem to be competitive yet”, Agritel reported, with this potentially related to the change of government there next month, and ideas of raised crop export taxes.

 

Still, it was Minneapolis spring wheat which outperformed this time, added 0.2% to $5.19 ¼ a bushel to rebuild its premium over Chicago, March basis.

 

For December delivery, Minneapolis, while up 0.2% at $5.04 ¼ a bushel, remains at an unusual discount to Chicago down 0.4% at $5.10 a bushel.

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