An analyst hopes higher Indonesian production and exports will help alleviate vegetable oil supplies that are too tight
The world’s largest producer of palm oil will harvest and ship out a record crop in 2021-22, according to the U.S. Department of Agriculture.
However, that is not something Canadian canola producers should be fretting about because of low vegetable oil stocks heading into the new crop year, said MarketsFarm analyst Bruce Burnett.
“We need the major oils to move up in production and exports in order to help alleviate the tight situation in global vegetable oils,” he said.
“If we don’t see that, then we’re in a world of hurt.”
The USDA’s Foreign Agriculture Service is forecasting 45.5 million tonnes of Indonesian palm oil production, a six percent increase over last year.
“Favourable weather, increased use of fertilizer and surging prices are expected to push Indonesia’s palm oil production and exports to record highs in 2021-22,” it said in a recent report.
The country’s palm oil exports are expected to reach 30 million tonnes, a nine percent increase over current year exports.
Speakers at the recent Virtual Palm and Lauric Oils Price Outlook Conference expect increased production of palm and soybean oil to put the brakes on global vegetable oil prices in 2021-22.
“We are in a bubble and the bubble will pop, but I don’t expect prices to collapse,” James Fry, chair of commodities consultancy LMC International, said during a presentation at the conference, according to a Reuters story.
The story suggests global vegetable oil prices are nearing their peak but will be slow to decline because of low carryout stocks and higher anticipated biodiesel production in the coming year.
Burnett agrees with that assessment.
“I don’t think anyone expects prices to remain where they are for next year, and the market certainly doesn’t anticipate that,” he said.
However, vegetable oil prices are not about to crash either. The USDA is forecasting 22.18 million tonnes of world vegetable oil ending stocks in 2020-21, a nine percent drop from the previous year.
“We’ve dug ourselves a bit of a hole globally. The market is going to be monitoring this very, very closely,” said Burnett.
Neil Blue, provincial crops market analyst with Alberta Agriculture, noted that palm oil usually trades at a significant discount to canola oil, but that hasn’t been the case of late.
“With that spread fairly tight right now, it just tends to be supportive to canola oil in the near term,” he said.
That dynamic may change if Indonesia starts producing and shipping out more palm oil, but he agrees with Burnett that the change won’t likely be too drastic because of the shortage of the commodity heading into 2021-22.
Indonesia’s national weather service expects that adequate rainfall will maintain water availability well into 2021, aiding near-term fruit set development.
Farmers are expected to increase harvest efficiency because of high prices. Crude palm oil prices reached over US$1,000 per tonne in February 2021, the highest level since 2012 and almost double the prices of last May.
“Fresh fruit bunches that may have previously gone uncollected due to height or otherwise challenging locations are now being harvested,” said the USDA.
High prices will also result in increased fertilizer use, despite rising fertilizer prices and reduced government fertilizer subsidies.
Indonesia’s export taxes and levies amount to $350 per tonne, which gives producers in neighbouring Malaysia a competitive advantage.
However, a labour shortage in Malaysia has resulted in less domestic supply for Malaysian refiners.
Analysts anticipate static output in that country with production remaining at 19.6 million tonnes.
The USDA expects Malaysia to export 17.3 million tonnes of palm oil in 2020-21. It does not yet have a forecast for the upcoming year.
Burnett anticipates an increase in world soybean oil production in 2021-22 with both the United States and South America harvesting larger crops.
However, he is also forecasting increased demand for vegetable oils, partly because of rising energy prices sparking more biodiesel production.
Rapeseed/canola oil production is somewhat in doubt because of smaller winter crops planted in the European Union and the Black Sea region.
His overall assessment is it will take more than one production year for global vegetable oil supplies to return to adequate or comfortable levels.