Market outlook: El Nino could squeeze oleochemical feedstocks globally

30 May 2014 10:05  [Source: ICB]

The El Nino weather phenomenon is expected to return this year, a development that could affect the biofuels and oleochemicals feedstock fats and grease markets, drive up global palm oil and tallow prices and lead to a massive soybean harvest in South America.

Temperatures in the Pacific Ocean are rising, prompting US Climate Prediction Center forecasters to predict a more than 65% chance for an El Nino by the end of the year. El Nino occurs irregularly every two to seven years and is associated with warmer than average years, according to forecasters at the US National Oceanic and Atmospheric Administration (NOAA).

Palm oil production Alamy


Weather threatens palm oil production in southeast Asia

The weather phenomenon leads to abnormally dry conditions over parts of Australia, Malaysia and Indonesia and wetter conditions in Argentina and Brazil, all of which are key producers for the fats and grease markets.

“The El Nino/La Nina climate pattern that alternately warms and cools the eastern tropical Pacific is the 800-pound gorilla of Earth’s climate system,” according to NOAA.

“On a global scale, no other single phenomenon has a greater influence on whether a year will be warmer, cooler, wetter, or drier than average,” NOAA said.

The international Research Institute for Climate and Society (IRI) at Columbia University in the US put the chances of El Nino occurring at more than 70% for August, an increase from the 60% probability of its March forecast and the 61% probability from NOAA/IRI official prediction. According to the updated IRI forecast, the probability increases to 75-80% by autumn.


El Nino, which has a reputation for triggering sharp run-ups for prices in global food, commodity and even metals markets, will likely create the perfect climate for the next soy harvest in Brazil and Argentina, according to a source with a large soybean crusher and biodiesel producer in the region.

In past years when El Nino was present, the phenomenon brought heavy rain to parts of Argentina and Brazil, which was ideal for soybeans, he said.

With one of the most efficient oil-crushing industries in existence, Argentina is the world’s third largest soybean producer and top soybean oil (SBO) and meal supplier, according to the US Department of Agriculture (USDA).

Argentina is also the world’s biggest biodiesel exporter, and the main feedstock for biodiesel, bio-crude glycerine and refined glycerine production is SBO.

Brazil is the second-largest soybean producer globally, while the US production is slightly larger than that of Brazil, the USDA said.

In contrast to Argentina, all of the biodiesel produced in Brazil is consumed domestically, and SBO makes up about 85% of the feedstock for its production.

World production of SBO will reach a record 44.6m tonnes in the 2013-2014 season, after bigger crops in Brazil and the US, USDA data shows.

US growers will plant a record 81.5m acres (33m ha) of soybeans this year, the USDA said in the latest Prospective Plantings Report on 31 March.

In the Midwest, where most of the crop is grown, El Nino weather tends to bring cooler, wetter conditions that aid crop development and yields, according to forecasters.

However, other parts of the world will see drier conditions, forecasters said.


El Nino could bring dry weather to Australia, which is already struggling with a drought that has forced ranchers in the world’s third-biggest beef exporter to sell more cows into slaughter.

US tallow-based fatty acid producers typically use bleachable fancy tallow (BFT), which comes from cattle slaughter as a feedstock.

In Australia, about two-thirds of the El Nino events since 1900 have resulted in major drought over large parts of the continent, the Australian government’s official weather forecasting bureau said.

“The expanse of drought conditions through 2013 will continue to place a major influence upon the industry throughout the coming year, along with the reported spectre of an increased chance of El Nino conditions,” said Meat and Livestock Australia, a trade group representing the industry there.

“Some will use this to create market noise and trade on volatility,” a large oleochemical producer in the US said. The source added that it is not concerned about it affecting tallow, which is major feedstock for US production.

However, in the US, beef prices already are at record highs, and increased transportation costs and rising uncertainty about future cattle herd size are adding upward pressure, industry analysts said.

The US national cattle herd is at a 63-year low because high grain prices and drought during the past several years have encouraged producers to send animals to slaughter early and to reduce herd sizes, a trader said.

Disruptions associated with El Nino have been most important for soft commodities, with palm oil being one of the most affected.

The most severe drought in almost two decades is threatening supplies of palm oil from Indonesia and Malaysia, the world’s biggest producers, and forecasters said that an El Nino weather pattern this year may cause even more damage.

Severe dryness in parts of Malaysia, Indonesia and Thailand since January has led to concerns among market participants that the stressed oil palms will produce less yield than expected.

“In the event that an El Nino develops, I believe crude palm oil futures will climb to 3,000 ringgits/tonne [Malaysia ringgits, or M$] beyond June,” said Dorab Mistry, director of India-based oleochemical manufacturer Godrej, at the Palm and Lauric Oils Conference & Exhibition Price Outlook 2014 in March “Production is likely to be affected from late 2014 onwards, and we may be staring at 3,500 ringgits.”

M$3,000 is equivalent to about $933.

“The lesson to be learnt is that we must never take ‘Mother Nature’ for granted,” he added.


At the time of the last strong El Nino, in 1997 and 1998, Indonesian palm oil production dropped by over 7% and Malaysian output fell by 5.5%, according to USDA data. The two countries account for about 86% of world supply, according to the USDA.

Biodiesel is an alternative fuel, produced from renewable resources. The most commonly used feedstocks are rapeseed, soy and palm oil.

There are three basic types of glycerine, based upon derivation – tallow-based, vegetable-based and synthetic. Crude glycerine a byproduct of the biodiesel production is at least 80% pure and is almost always refined to further points of purity up to 99%. Vegetable glycerine is derived from natural oils such as coconut, palm kernel oil (PKO) and palm stearin.

By: Leela Landress
+1 713 525 2653

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