In the eye of the storm: How the oilseeds market emerged as the global driver of agriculture markets, its role in wider food price inflation
Rebounding demand from China and surging demand from North America and Europe is creating an increasingly volatile market for oilseeds and pushing food prices up. In that volatile environment, where are the opportunities and how do you manage risk in an increasingly uncertain landscape?
The outlook for the global oilseeds market has never been more compelling while the strands of long-running global demand trends become entwined in new, emerging fundamental strains. Global demand for oilseeds - including soybeans, canola, and palm - is returning from China and rising in North America and Europe. Three key forces within these regions are driving the concurrent growth in demand:
- The recovery in China’s hog herd and restructuring of its hog industry after a devastating African swine fever (ASF) pandemic.
- A renewed push for alternative fuels in North America unlocking some of the untapped potential in aviation and diesel fuels.
- The move away from palm oil across the EU amid accusations of deforestation.
These big plays will simultaneously create volatility and growth within the market, straining supply options and bringing uncertainty to pricing outlooks and existing hedging mechanisms on traditional exchanges.
More pertinently, the knock-on impact is likely to drive the price of food at a global scale, and not just within the oilseeds space.
As global economies look to recover from the effects of Covid-19, the US Consumer Price Index (CPI) has risen by 4.2% year on year - its fastest rate of increase since September 2008. While the price of energy and automotive vehicles has risen, the most significant rise is in food prices - a dynamic everyone can feel.
The Food and Agriculture Organization’s (FAO) food index price, which measures changes in the price of cereals, oilseeds, dairy products, meat and sugar, jumped from an average 108.6 in December 2020 to 127.1 in May 2021. The FAO said this is primarily due to the rise in the cereals, sugar and vegetable oils markets, all of which have surged on renewed expectations of growth and worries over production outlooks for upcoming crops.
Soybeans have a fine line between strong demand, particularly from China, and finite US and Brazilian production, but the return of buying appetite across the broader oilseed spectrum has brought difficulties, despite some of the biggest production figures in history.
In that environment, the impact of any wrinkle in the supply chain is magnified in the face of unyielding consumption estimates, with strong demand for US soybeans coming amid recent delays to Brazil’s huge harvest. Alongside that, issues around Argentina’s supply logistics - and a government that is inclined to punish exporters as it tries to cap domestic prices - raise questions over the supply of oils and meals out of one of the world’s biggest suppliers.
This move has brought a strong bullish narrative to the oilseeds market, while rising demand for North and South American soybean crops collides with a ramp-up in China’s corn and soybean buying and the country seeks to plug potentially huge gaps in its feed import slate.
Normally, farmers would switch production from corn to soybeans according to price signals but with both main crops reporting multi-year price highs, the ability to maximize one over the other is limited.
That is a key dynamic that has resulted in sharp rises in global food prices that cannot be ignored and spell challenges for exporters, governments and, ultimately, for all of us.
In that volatile environment, where are the opportunities and how do you manage risk in an increasingly uncertain landscape?
China’s epic buying power
China is one of the world’s biggest producers and importers of many agricultural commodities; its buying - or just market expectations of its buying - increasingly influences global price direction and wider market sentiment. That means China’s domestic dynamics, and government edicts, have global consequences.
China’s reliance on using stocks to cap domestic price inflation, coupled with a concerted effort to de-stock old inventories, has resulted in mounting market expectations that the country now has a large hole in its corn coverage, which will fuel strong imports.
The dynamic has already propelled China to become the biggest corn importer in the world in recent months, despite it being the second biggest corn producer globally, surpassing other big corn importers such as Mexico, Japan, South Korea and Vietnam.
China’s soybean inventories are also the subject of much scrutiny, while investors and analysts try to gauge the scale of demand for oilseed and its derivatives - particularly soymeal, a key feed for animals and, in particular, China’s huge pig herd.
Fastmarkets’ AgriCensus reporter, Eduardo Tinti, has reported on the growing pull of China and how it underpins what is expected to be a record season for Brazil’s soybean exporters, after 17.4 million tonnes of soybeans were exported from the country in May, with 72% heading to China.
Before that, the US reported total soybean exports of 57 million tonnes between September 2020 and May 2021, with China accounting for a dominant 61% of that buying while relationships between the two powers normalized after a bruising trade war.
The rapid recovery of China’s pig industry is one of the main drivers for global animal feed demand but recent explosive growth has been pared back amid twin pandemics, the first targeting the country’s hog herd and the other a broader swathe of economic activity.
Collectively, the impact of ASF has driven change within the pig industry both in China and across the wider region, in a business that small, often family-owned businesses used to dominate becomes increasingly industrialized.
The change offers opportunities to tighten up on biosecurity but also brings scale to the supply of animal feed to the developing herd.
The severity of the outbreak meant the pig population fell by a third in China, down to 310 million head in 2019 from 428 million head recorded in 2018. This rapid decline meant demand for soymeal and soybeans contracted, however, this is now bouncing back.
That recovery has underpinned much of the demand assumptions that analysts and investors are working to, while dry weather across key producing regions raises the question of whether supply can keep up? But, with lingering ASF outbreaks again reported and signs that the country’s bean stocks are building, investor confidence has been shaken and acute price volatility has followed.
Can the US keep up with foreign demand?
Soybeans are a key barometer illustrating how internal demand from China is increasingly driving global markets, while the country’s huge crush sector pulls in millions of tonnes of soybeans as a feedstock to produce soymeal.
Brazil and the US have worked in a complementary cycle while China alternated its supply between the northern and southern hemisphere seasons to ensure year-round support, but the US-Sino trade war disrupted the regular routine. The Phase 1 trade deal between the world’s two biggest economies resolved some of the issues and ended with China committing to boost its purchases of US agriculture products.
“The US market recorded a surge in shipments to China in 2020/21 due to the Phase 1 agreement [the end of the trade war], a recovery in hog numbers and a delay in Brazilian planting, which meant the Brazilian export window opened later than usual,” The Jacobsen principal analyst, Tore Alden, said.
With Chinese demand especially high, and US supplies already tight, CBOT US soybean futures prices have soared to near seven-year highs but this is not the only dynamic being felt.
Keeping up with US domestic fuel demand
As well as demand from China, the US needs to match its own domestic demand for oilseeds, which resurgent fuel demand has amplified. Soybean oil values continue to rise concurrent with the growth in the US biodiesel industry while the arrival of President Joe Biden is raising hopes that his administration could push sustainability as a key policy in transportation fuels.
“Longstanding programs, including the federal Renewable Fuel Standard (RFS) and the California Low-Carbon Fuel Standard (LCFS), are at a juncture where the cost of compliance has pushed oil refiners to become credit generators versus deficit generators,” The Jacobsen managing editor, Ryan Standard, said. “A dynamic that brings added incentive to conventional fuel producers to boost their green credentials.”
“Additionally, increased consumer demand for low-carbon intensity fuels has pushed the traditional fossil fuel sector into the clean energy revolution. Strong support from the Biden administration has helped provide a solid foundation for the future,” Standard said.
Talks of a clean energy revolution have included the possibility of the US federal RFS program - the main legislative structure that drives biofuel use - being expanded and updated to resemble the LCFS and its use of carbon intensity scores and credit/deficit generation to bridge the gap to zero-emission vehicles. California has blazed a trail of innovation and sought to reflect the full environmental impact of the feedstocks used to generate biofuels and promote the use of advanced fuels, both to break the food-versus-fuel debate and to tackle tougher sectors to de-carbonize, such as aviation.
The chief executive officer of Bunge, Gregory Heckman, referred to the renewable diesel expansion as a “structural shift” in demand for edible oils. Such a shift means US soybean oil demand could outstrip production as soon as 2023 if the US renewable fuels industry continues to grow at such a rate, Alden said.
Palm oil and the EU
Added to that powerful mixture are issues surrounding palm oil, which must also be examined when discussing oilseeds demand. A growing awareness of, and sensitivity to, the effect of some palm oils on deforestation has cast a long shadow over the grade and brought the EU to explicitly rule out the soft oil as part of the bloc’s future energy needs.
But the ban comes concurrent with Europe’s sophisticated biodiesel sector gearing up to boost production of highly sought-after advanced biofuels - including heavily processed grades such as hydrotreated vegetable oils (HVO) and hydroprocessed esters and fatty acids (HEFA). Both of these grades rely on a raft of feedstocks - including palm - to produce high quality Arctic-grade diesel fuels and sustainable aviation fuels.
The ban is likely to curtail imports of palm oil but the knock-on effect of freezing out the edible oil from the slate of biodiesel feedstocks should drive demand into other vegetable oils - a trend that is already being felt across not only virgin vegetable oils but increasingly in the used cooking oil space as well.
The future of the oilseeds market
The net effect of these trends is likely to bring acute uncertainty to market outlooks while participants wrestle with increased volatility amid growing Chinese demand, a renewed biofuel sector and the EU’s stand on palm oil.
This comes concurrent with food inflation and rising food prices front and center in the press. In the US, the higher price of commodities is pegged as one reason for this, alongside bottlenecks in supply chains following the pandemic when demand shifted toward goods over services. Though this price rise is the most significant in the last 12 years, it is transitory. Although the base effects will likely mean annual inflation rises even higher in the months ahead while supply chains adapt, which will then allow the jump to level out.
In an agriculture context, however, the adaptation of supply chains is complex, especially with Brazil’s recent expansion of farmland into the Amazonian and Cerrado regions of the country, which again raises the spectre of land-use change and highlights the limited options farmers have to expand.
For the US, farmers face a similar dilemma but for different reasons because unusually high prices for corn and soybeans mean farmers have limited flexibility to switch between crops.
On top of that, the effects of climate change are also likely to play an increasingly evident role. Recent price strength comes against record production figures, with the US Department of Agriculture (USDA) expecting farmers globally to produce nearly 1.2 billion tonnes of corn, 789 million tonnes of wheat and 385 million tonnes of soybeans in 2022 - the biggest crops ever recorded if realized.
This would build on the record crops delivered in 2021 as well, which themselves have not been enough to satisfy expectations of recovering demand. Dry conditions hit many main producing regions so planting was delayed, as in the case of Brazil’s soybean crop, or production outlooks were drastically reduced. The key metric that analysts are watching closely has been ending stock estimates, which have fallen year on year despite a steady increase in soybean production figures.
Even so, we must consider the impact on both the commodity markets themselves, as well as on the global economic outlook and post-pandemic recovery. When pairing food price increases with reduced incomes - such as those experienced for many throughout lockdown - the World Bank said this tendency aggravated situations of chronic and acute hunger for those at risk in almost every country.
As these dynamics unfold across world markets, governments have shown a willingness to implement outright bans on export trade and impose new taxes to stifle the impact of firmer prices on their citizens. These are measures that bring further upward price pressure and feed into the volatility and uncertainty.
Effective price reporting of the type that Fastmarkets Agriculture delivers can build new tools that will enable the industry to find its own solutions to these problems, enabling improved risk management strategies even against mounting uncertainty and volatility. Fastmarkets is the biggest agriculture price reporting agency and our comprehensive coverage is truly global.
Finally, if we can expect the demand for agricultural commodities including oilseeds to continue to rise, we must also consider the question – how this will play out for food prices in the years to come? And, more importantly, how will this affect the world population and those already experiencing food scarcity?
Read more on our oilseeds and grains insights hub
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