Feature: Demand-fueled speculation for global vegetable oils here to stay

New Delhi — The global vegetable oils and fats industry has seen the sharpest inflation of all the agricultural commodities in the last one year, and the price rally is showing no signals of slowing in the near-term.

After lower production and tight inventory fueled a 10-month rally in prices of palm, soy, rape and sunflower oils, industry watchers expected prices to cool by March -- seasonally the time when production of palm and soybean oils picks up.

But well into April, prices of palm and soy oil have yet to see a pullback.

Fears of export quotas by Russia and Ukraine boosted sunflower oil prices, while weather concerns in South America, tight US supplies and strong Chinese demand have supported soybean oil, or SBO, prices, a source said.

And as India and China -- the largest importers of vegetable oils -- buy up palm and soy oil at pre-pandemic levels, producers have been left with record-low ending stocks. Without a quick way to dramatically ramp up production, there is very little incentive for prices to come down to 2019 levels.

"Platts Analytics sees some fundamental support, but I would not call it strong. In fact, most of the support in vegetable oil prices to this point has been speculative in nature," Peter Meyer, head of Grains and Oilseeds Analytics at S&P Global Platts, said.

This red-hot supply-demand situation steamed further ahead this year following Joe Biden winning the US presidency in December 2020.

Biodiesel and Biden

With Joe Biden's election and subsequent push for green energy, demand for vegetable oils used to make biodiesel has increased -- a fact that is not lost on traders.

"It is difficult to imagine that all of the new renewable diesel plants that have been announced in the US actually come to fruition. There's just not enough feedstock for all of these announced plants," Meyer said. "Even with additional demand from the biofuel industry, soy oil prices are 10-15 cents/pound overpriced, a premium built into the market by speculators."

Global soybean production is dominated by the US, Brazil, and Argentina, and the largest palm oil producers are Indonesia and Malaysia. All these countries have relaxed state-subsidized biodiesel mandates in the past few months due to current vegetable oil prices.

The latest among these was a resolution by Brazil's National Agency of Petroleum, Natural Gas and Biofuels, or ANP, to reduce the mandatory biodiesel blend in diesel to 10% from 13% for May and June.

The development comes less than a month after Bento Albuquerque, the minister of mines and energy in Brazil, committed to increasing the biodiesel blend in fossil fuel to 13%.  

In Europe, crude palm oil and soybean oil are being phased out as feedstocks for biodiesel, but this puts more pressure on other European feedstocks such as rapeseed oil, as well as advanced biodiesel feedstocks like used cooking oil, a source said.

Speculation clouds outlook

Some market analysts are seeing signs of a new commodity super cycle, pointing to a weakening US dollar and supportive central banks. Mechanically, a weaker dollar often supports higher commodity prices.

"When interest rates are zero, the credit created in the economy must find a home, and one such home is the commodity market, with buyers hoping to ride the speculative wave," James Fry, chairman of commodities consultancy LMC International said at a virtual industry event in March.

Egged on by tight inventories, speculation may keep prices afloat for a lot longer than expected. In April, CPO and SBO prices hit their lifetime high in India.

Speculators have also pushed rates of soybean to record highs in the last week, analysts said.

The interesting thing about the vegetable oil price rally is the increase in volatility, the strong fundamentals at play, and the role of funds positioning in futures contracts, which have contributed towards more fluctuations and swings in price, according to a source.

But despite the huge price rallies seen in the agriculture commodities over the last year, questions over the commodity super-cycle are still abound.

"I personally do not believe that agricultural markets are in a so-called commodity super cycle; Balance sheets for major row crops are tight globally as countries focus on food security because of the pandemic. Veg oil rally is psychological, not cyclical," Meyer said.