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06/12/2017 0:00 - Agricultural Commodities Market
What does the future hold for Argentine soybean oil?

1. What is happening around the world with vegetable oils?

According to their forecasts for September 2017, Oil World expects that in the current marketing year (2017/18) the world consumption of vegetable oils will be slightly lower than its production, consequently increasing ending stock levels at the end of the campaign. The latter would increase from 24.6 million tons in 2016/17 to 26.6 Mt in 2017/18. Although this bearish data limited price gains this year, this was not enough to interrupt the trend towards the recovery of international prices that began in 2016.

If Oil World forecasts for the 2017/2018 season are confirmed, the world production of vegetable oils (including palm oil, soybean, rapeseed, sunflower, palm kernel, peanut, cotton, coconut and olive oil) would increase by 3.6% when compared to last year and 21.7% when compared the average 2011/2012 levels. During the 2011/2012 cycle almost 160 million tons were obtained, whereas for the 2017/2018 a global production of 194.7 million tons is expected; that is, almost 35 million tons more than six years ago (Table N ° 1).

The trend towards an increase in the world production of vegetable oils is evident over the last six years, driven by its two main oils: palm and soybean. These two products represent 65% of the total vegetable oils.

The five most important vegetable oils - in terms of global production measured in tons - are palm oil, soybean, and rapeseed, sunflower and palm kernel. They represent 90% of the world production of vegetable oils. These five products show sustained increases over the last six years. Palm oil, which ranks first overall, had a world production of 52.4 million tons in the 2011/2012 cycle. In 2017/2018, Oil World expects a global production of 68.7 million tons, with a projected growth for the period of 31%.

Stronger still would be the growth in the world production of soybean oil, which ranks second. In 2011/2012, approximately 42.2 million tons were produced, while in 2017/2018 a record of 56 million tons is expected. Almost 14 million tons per year more than six years ago.

Rapeseed oil (3rd in the ranking) would show a slight increase respect for six years ago: in 2011/2012, approximately 24.4 million tons were produced, while in 2017/2018 a total of 25.3 million tons are expected. It would increase only 3.6% in six years.

In terms of world domestic consumption of vegetable oils, in table N ° 1 we see that in the 2011/2012 cycle global consumption amounted to 157 million tons. An increase to 192.4 million tons per year is projected for 2017/2018, which represents an increase of 22.6% compared to the global domestic consumption registered in 2011/2012.

As can be seen, in the last six years the increase in world production has been slightly lower than that of world domestic consumption: 21.7% vs 22.6%.

Finally, according to Table N° 2, global ending stocks of vegetable oils would rise from 24.6 million tons in 2016/17 to 26.7 million tons in the current marketing year, mainly behind a 33% rise in soybean oil ending stocks.

2. What do the international prices of vegetable oils show?

The international prices of the main vegetable oils worldwide (palm, soybean, rapeseed and sunflower) had fallen progressively from the first semester of 2011 until almost the end of 2015 as shown in Graph N ° 1. However, the commercial campaign that went from October 2015 to September 2016 brought with it a moderate drop in production combined with a notable increase in the consumption of vegetable oils, motivated by the relative cheapening of the product. As a result, the final stock left by the 2015/16 cycle of 24.3 Mt was 17% lower than the previous year, triggering a general recovery in prices.

Since then, although world prices of vegetable oils have shown their ups and downs more or less pronounced according to the specific product, the general trend has been moderately bullish. Increases in production have made it possible comfortably compensate the increase in world consumption, and although stocks have recovered to 26.6 Mt (estimated 2017/2018), they still remain below the 29.4 Mt of the campaign 2014/15. On the other hand, the gradual recovery of the price of oil in the world (today, in the United States, is trading at its highest values in the last two years) is among the main drivers for prices.

In recent times, the recovery in prices was put to the test after India, one of the world's largest buyers of vegetable oils, increased tariffs on imports of these products. However, there were other news that helped propped up prices. Indeed, as international agencies such as NOAA in the United States or the Australian Meteorological Agency raised the odds of a “La Niña” phenomenon (between December of this year and February 2018) by more than 70%, India’s decision has had a lower impact on prices than it was expected.

“La Niña” years are associated with rains above normal in areas of Southeast Asia, so there are fears that yields fall below trend levels and harvest and transport of oilseed will become difficult.
At the same time, the phenomenon generates rains below normal in our main producing area just in the critical period for the definition of yields of soybeans, which may damage the soybean campaign and, therefore, the production and export of its by-products. In short, the nervousness has spread to the market and prices received support, even in spite of the commercial policy measures announced by India.

3. What is the situation in India, the main buyer of soybean oil in the world and the purchaser of most of the Argentine exports?

In India, the accumulation of stocks became the norm because of low prices and the international context. Faced with this scenario, it was anticipated in the market that some decision would be made in relation to tariffs, since the State had few tools left to prop up local production that would not result in an excessive increase in public spending. In this sense, both buying the grain directly from the producer and granting a subsidy for the differential between the market price and a guaranteed minimum price would erode the fiscal results, while in the case of the import tariff the burden falls on domestic consumers and, to a lesser extent, on foreign exporting countries.

Among these, the measure of increase in Indian tariffs caused a great impact in our country. In 2016, India was the destination of more than half of Argentine exports of vegetable oils, as shown in Graph No. 2 based on data from SENASA.

However, although oil imports from India would not increase according to original estimates, they still would be even higher than the previous cycle, since the country's dependence on purchases abroad of this type of oil is very high, and the higher tariffs will not be enough to change that. In the 2016/17 cycle, India produced almost 15 million tons of oils, while it imported 22 million. The measure aims only to improve the profitability of internal processors of oilseeds and not to totally eliminate international dependence. In this context, it is expected that in volume exports will be supported, although the doubt remains on the side of the values to which it will be feasible to place the merchandise.


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