Oils and Fats Prices Rally on Strong Market Fundamentals

22 July 2002 00:00  [Source: ICB Americas]

Prices within the oils and fats complex have rallied significantly over the past few months led by price hikes for vegetable oils, soybean oil and palm oil. Marketing problems in South America have pushed oilseed derivative prices up, but the current key price-making factor is the weather and growing conditions in the US, according to traders. The long-term scenario for oils pricing remains bullish with the continued tightening of global vegetable oil supplies because of shrinking stocks of oilseeds and oils and decreased oilseed harvests for 2002/2003.

"An astounding rally in palm oil and soybean oil in the past few weeks has taken many market participants by surprise," said Thomas Mielke, editor of Oil World, at a conference last month. "We saw that as a long delayed response to the squeezed supplies brought by insufficient world production and the need to sharply cut world oils and fats stocks to satisfy demand."

The supply problems were compounded by marketing constraints of South American soybeans, says Mr. Mielke. Financial and political constraints in Argentina and currency devaluations in Brazil resulted in delayed South American exports of oilseeds and oils, which in turn caused buyers to purchase US soybean oil and Asian palm oil instead. "However, Malaysia and Indonesia cannot bridge the supply gap this year as their domestic palm oil production is insufficient and their stocks have fallen below the year-ago level," says Mr. Mielke.

As of July, global vegetable oil ending stocks for 2002/2003 are projected at 7.1 million tons, down 2 percent from the 2001/2002 estimated stocks, according to the US Department of Agriculture. Foreign vegetable oil ending stocks are down 1 percent to 5.6 million tons, and projected US vegetable oil stocks are down 6 percent to 1.5 million tons.

In the US, the potential for a below-trend yield of soybean crops because of hot and dry weather could further result in critically low inventories at the end of 2002/2003 crop year and further raise domestic prices for soybeans, soybean oil and meal. Crude soybean oil spot prices have been steady at 18 cents per pound for more than a month, the highest seen this year. Soybean meal prices are climbing as well and have reached the high $180-per-ton level. Prices for soybean oil and soybean meal at the start of the year were respectively at 15 cents per pound and $150 per ton.

"US soybean crop conditions declined, and some forecasts pointed to stressful crop weather in the Midwest," says Richard Hilts, director of oil sales at Central Soya Company Inc.

"Europe will need to import more soybeans due to minimal improvement in their domestic oilseed crops while China is now trying to build up stocks again by importing heavily as they had halted oilseed imports for several months earlier this year. India has also about exhausted its domestic oilseed supplies and will soon be importing large volumes of oil, particularly soybean oil," he adds.

The bullish climate in world vegetable oil prices has spilled over to the animal fats market as well. Prices for animal fats this year have gone from a low of 10 cents to a high of 16 cents (delivered, Chicago basis) in June, in spite of above average cattle and hog slaughter in the past two months.

"Demand for overall fats and oils has been excellent, and with oils prices starting to go up in March and April, animal fats finally responded in May and June," says Mitch Kilanowski, executive vice president of marketing and research at Darling International Inc., a major animal fats producer. "Compared to other fats and oils, animal fats were a bargain. Demand, especially exports, has increased, exceeding supply and raising animal fats prices."

Industry reports show exports of edible and inedible tallow and grease increasing 23 percent for the period October 2001 to April 2002, compared to the same period a year ago, notes Mr. Kilanowski. "Most of this extra demand was from Asia and Mexico whose imports rose 38 percent and 90 percent, respectively. The reason for this increase of course was the high Malaysian palm oil prices," says Mr. Kilanowski. The current palm stearin price is placed at $365 per ton fob Malaysia, compared to last year's price of $226 per ton in July.

Average prices for tallow and grease this year are projected to be higher than last year because of lower overall fats and oils stocks and increase in demand. However, current weather conditions in the US could keep prices volatile for the next few months, says Michael Musgrave, general manager at Darling International's Nebraska facilities.

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