EDIBLE OIL PRICES RALLY SHARPLY ON DROUGHT
- By Gregory Meyer and Leslie Hook
The world is coming to grips with escalating prices for oil: vegetable oil, that is.
Edible oils and the beans, seeds and nuts they are squeezed from are outpacing other agricultural commodity markets this year. Rising prices, which are luring hedge funds, reflect concerns about supply and could elicit a response by farmers.
Oilseeds get less attention than staple grains but their products find their way into goods including confectionary, pork, biodiesel fuel and ink. Soyabeans are the US' second-biggest export to China, topping aircraft, cars and semiconductors.
After bottoming in mid-December, soyabean prices have gained 21 per cent, a bigger increase than for corn and cotton. Global vegetable oil stocks are set to fall to the lowest in 35 years as a share of use, the US Department of Agriculture estimates.
The market rally is likely to affect farmers' planting plans and a range of businesses such as Wilmar, the Singapore-listed palm oil and grains trader, and JM Smucker, which makes Crisco, a brand of shortening and oil.
The trigger for price moves was a blistering drought in South America, which grows half the world's soyabeans. Oil World, a Hamburg-based forecaster, last week said world soyabean production would probably fall by a record 22m-23m tonnes this season.
In the US, the agriculture department expects farmers to subtract acreage from soyabeans so they can plant more corn. The rally in oilseeds could upset these forecasts when a formal planting survey is published on March 30.
"We're in acre-buying mode. Oilseeds in general are telling the marketplace they want more acres," says Todd Hames, who grows canola oil seeds on half his 4,700 acres in Alberta, Canada.
But grain prices are high, too, making the scale of any shift to oilseeds hard to determine.
In China, which buys 62 per cent of the world's soyabean imports, there are signs farmers will switch away from beans as local corn prices reach record highs.
"Nobody is going to plant soyabeans this year," says Wang Caizhu, a seed and fertilizer dealer in Heilongjiang, China's soyabean heartland. "Farmers now prefer corn – which is more of a money maker."
China's demand for soyabeans has been steadily increasing as Chinese eat more protein and oil, but China's production of soyabeans has been declining.
This year, the China National Grain and Oils Information Centre estimates that farmers could plant 7.7m hectares of soyabeans, more than last year but much less than historical averages of more than 9m hectares annually during the past decade.
The primary product from soyabeans is protein meal fed to livestock, then oil.
In Chicago, soya meal futures have risen 29 per cent since December, while soya oil has gained 12 per cent. That emphasises the importance of South America in the oilseeds market. Hedge funds have bet big on soyabeans after unwinding bearish positions late last year, according to the Commodity Futures Trading Commission.
Oilier commodities have risen, too. At the Bursa Malaysia exchange, crude palm oil has shot to a nine-month high. Since December, ICE Futures Canada canola oil futures have added 19 per cent, while in Paris NYSE Liffe rapeseed has increased 13 per cent.
They are rising in tandem because most vegetable oils can be freely substituted. Globally, oilseed production is expected this year to fall about 9m tonnes while demand rises about 12m tonnes, says Mark Ash, USDA economist.
"That is going to contract sharply the amount of oilseed stocks we have in the world," he says.
Petroleum markets have also underpinned vegetable oils.
Biofuels now consume more than 12 per cent of global vegetable oil supplies, says Rabobank. Europe, unable to make enough biodiesel of its own, imports biodiesel refined from South American soyabeans and Indonesian palm. In the US, biodiesel production more than doubled last year.
"There are many factors at play here, but certainly the increased use of crops to produce biofuels is one of the key reasons that veg-oil prices have become highly correlated with energy prices," says Erin FitzPatrick, Rabobank commodities analyst.
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