Insight Focus
- Palm oil production growth is sluggish.
- Soybean production prospects depend on Argentina rebounding.
- Animal feed demand for soybean meal remains robust.
For timely updates on the global palm markets I follow Nadhem Khouni on LinkedIn. If you are a global oilseed trader/renewable diesel producer maybe you should too! This was a timely quote below from Dr. Sathia Varqa of Fastmarkets: “the vegoil market is facing pressure due to a booming outlook for palm and soybean production.”
Note that word “booming” and the focus on production (which I think is an accurate appraisal of the vegetable oil market’s mindset: a current focus on production, not demand). In my humble opinion “booming” is a word to be used sparingly for the future of global palm oil production as this upcoming year’s growth rate is forecasted to slow significantly. USDA’s Oilseeds World Markets and Trade May 2023, featuring the first supply and demand forecasts for global oilseeds for the upcoming year (October-September), has Indonesian palm production up 1 million metric tons (mmt) from 46 to 47 mmt; Malaysian production up .3 from 19 to 19.3 mmt. I have a tough time seeing that future growth as booming.
More importantly (and more market moving) ending stocks for Indonesian palm according to the USDA decline from 6.6 to 5.1 mmt due to domestic consumption growing to a record 20.1 from 18.7 mmt due expanded consumption for biodiesel production (see USDA’s chart detailing industrial consumption below). Malaysian ending stocks increase slightly to 2.49 from 2.41 mmt BUT global ending stocks decline from 16.91 to 16.52 mmt. Palm is the most consumed vegetable oil globally.
Vegetable oil prices are in full retreat right now for sure and palm is joining the speculative long liquidation now evolving to a speculative short position; however, USDA’s version of the global palm oil balance sheet for next year has tighter ending stocks and a declining stocks-to-usage ratio (21.14% available ending stocks relative to demand versus 22.40% this year).
Global production for next year grows 1.42 mmt for next year BUT global demand expands 2.44 mmt.
Here is the full USDA’s May 2023 global palm oil supply and demand table:
Dr. Varqa’s comment about booming production of soybeans comports well with the USDA’s view of the world. In a recent post I quickly ran through the USDA’s May 2023 forecast for the coming year that can be summed nicely in two words: Argentina miraculously recovers. For those who missed the post you can find it here: https://tinyurl.com/bddhyyzu
There is so much turbulence right now in the global biofuel space with significant renewable fuel production capacity expansion driving investment in sustainable aviation fuel buffeted by stories like this:
Airlines would face margin compression and consumers would face sharply higher ticket prices should a mandate occur with “green fuel’s price premium”, as the FT puts it in the chart below, remaining at current ratios to conventional fuel. See the explanation of the impact on ticket prices calculated below.
Using a very basic analysis, I assume that fuel makes up 30% of an airline ticket’s price (various sources), that inflation remains at 5% for all non-fuel costs, and that green fuel increases prices at 2.50 or 3 or 3.5 times (see FT’s chart). The result is not business or traveler friendly: ticket prices jump 49% to 79% and fuel’s percent of the airline ticket price jumps from 30% to 51% to 59% or put more succinctly every airline passenger needs to hedge their exposure to air travel via corn and soybean oil futures contracts. Are consumers ready to pay those higher prices (and open those futures trading accounts)?
A new tone I am now hearing from the traditional producers of Jet A and petroleum-based road fuels is a growing confidence that consumers and governments might have had a great awakening to the cost and the realistic timing for a “transition” to sustainable, renewable fuels and those traditional refiners of fuels who were going “green” now march to a different, slower alternative fuel drumbeat. Have the leaders of traditional fuel production got their finger on the consumer pulse? Do they understand consumers want inexpensive air travel and are not prepared today to pay a green premium? Do petroleum refiners’ management teams also understand that government’s may have their fingers on the same pulse and understand the consumer perspective is now different? The “new” tone is nicely summarized here:
Did the Swedish government decide that tax revenue trumped green initiatives? Is this also a “new” tone?
So are the realities of the cost-of-living increases (inflation) starting to change consumer perspectives about petroleum? I have no idea as I do not operate in the world of the retail consumer, never have; I operate in the world of industrial agricultural processing, far removed from the retail consumer. But nonetheless I can hear the drumbeat and the tone changing and the above examples are just a few of many available to share.
What could this drumbeat slowing possibly mean for the US soybean processing industry and the growth trajectory it is on to meet the demands from domestic biofuel requirements now part of US federal policy because of the Inflation Reduction Act? First and foremost it is important to consider these soybean processing yield ratios:
The above is a snapshot of the standard product ratios that global soybean processors realize when processing soybeans at 12.50% moisture. While this is an essay on the global vegetable oil dynamic I will veer briefly into the key purpose of soybean processing: the production of protein meal (72%) and soybean hulls (6%) for animal feed. In other words, 78% of the soybean processing industry’s production yields key animal feed ingredients and demand for those ingredients remains robust. The US soybean industry’s largest customer is the US broiler (chickens raised for meat) industry and the 12 year growth trend remains firmly intact according to the USDA’s Livestock, Dairy, and Poultry Outlook May 2023:
Back to soybean oil. If 19.50% of the production from soybean processing is oil, then a quick perusal of USDA’s forecast for soybean oil in the coming year via the USDA’s World Agricultural Supply and Demand Estimates (WASDE) report provides this ratio:
12,500 (biofuel demand for US soybean oil production in the coming marketing year which begins in October 2023 and ends in September 2024) divided by 27,145 (total US soybean oil to be produced in the coming 2023/24 marketing year) = 46%. If 19.50% of the soybean process is oil, then 19.50% * 46% of the demand from biofuel puts the US soybean industry’s revenue and margin risk from government biofuel policy changes (road or aviation) and petroleum refiners’ drumbeat slowdowns at 8.97%.
So mega trends in the pursuit of biofuels for aviation discussed in my earlier post this month https://tinyurl.com/yh4dzj2h meet drumbeat slowing from consumers and governments for higher priced green fuels and potentially a reset of biofuel transition timelines that petroleum refining CEO’s now feel comfortable discussing publicly (saying the quiet part out loud) may come next.
And what does that mean for US (and global) soybean processing companies: 8.97% of margin revenue may be turbulent moving forward but the domestic poultry industry remains on its sustained growth trend and Argentina remains a question mark for its recovery so US soybean meal exports expand and the US soybean industry grows. The USDA’s WASDE summarized the outlook for next year this way:
- Higher domestic soybean crush with capacity expansion
- More domestic soybean supplies available to processors given a “truly booming” Brazilian soybean production flowing into traditional US export channels
- Higher US soybean meal domestic usage
- Higher US soybean meal exports with growing global share due Argentina’s production doom loop
- Higher US soybean oil demand for renewable diesel road fuel demand
100% – 8.97% = 91.03% of the business for the US soybean processing industry has a great drumbeat.
And for the professional traders/readers: the middle part of the soybean oil curve still looking good:
Source: Refinitiv Eikon
