On the (B)oil: Vegetable Oil Price Outlook for 2016
- As of January 2016, average prices of palm, sunflower, and rapeseed oils are forecast to rise in 2016, whereas the average price of soybean oil is expected to remain stable.
- Industry stakeholders are likely to adopt strategies such as entering into futures contracts and increasing vegetable oil stocks to leverage low market prices and reduce input costs in the future.
The year 2015 witnessed some volatile movements in vegetable oil prices (Figure 1), with palm oil prices falling to new lows. In December 2015, the FAO Vegetable Oil Price Index inched up 2.9 points (2.1% M-o-M) to 141.1, primarily driven by a spike in soybean oil prices. This reflected uncertainty over Brazil’s soybean crop amid prospects of firming global soybean oil demand. Overall, the index declined 19% Y-o-Y in 2015 to an average of 147 points, representing a 9-year low.
It is in this scenario that The Smart Cube offers a brief price outlook for vegetable oils in 2016 and examines possible strategies that buyers can adopt for the most widely used vegetable oils, such as palm, soybean, sunflower and rapeseed.
Outlook for 2016
“We are going to see more global demand shift to palm oil and I see it coming from the food sector in the months ahead. High stocks in Malaysia and Indonesia of close to 6 million MT will come down sharply by mid-2016… Due to El Nino, Malaysia’s palms would be hit by severe stress of drought, and oil supply is likely to stagnate at 19.5 million MT. As for Indonesia, I forecast an output of 33.6 million MT.” – Thomas Mielke, Executive Director, ISTA Mielke (November 2015)
In December 2015, the USDA brought down its forecast of global palm oil output over the 2015–2016 cycle by 2.5 million MT to 62.6 million MT due to lower production estimates for Indonesia and Malaysia in the wake of El Niño. However, this phenomenon is not likely to hit global palm oil production, which is forecast to rise 2% Y-o-Y during the 2015–2016 cycle. According to the Malaysian Palm Oil Board, in December 2015, total palm oil stocks in Malaysia were 31% higher than the previous year.
The Indonesian government’s increased biodiesel mandate is expected to support palm oil prices, though experts are concerned whether the government will be able to implement the mandate successfully, given the rising cost of that subsidy for biodiesel.
"If Indonesia really consumes 3 million MT of palm oil in its biodiesel mandate, prices would rise and I think to the region of US$600 per MT.” – Dorab Mistry, Director, Godrej International (November 2015)
Despite a high global output, factors such as Indonesia’s biodiesel mandate, a weakening ringgit and rising demand from India are expected to drive palm oil prices up in the coming months. In 2016, The Smart Cube estimates prices to average ~$594/MT — a rise of ~6% from January 2016.
“El Nino years are likely to bring plentiful rain to the soybean belt in South America. So it is quite possible we are on our way to a third bumper season of soya in South America in 2016. On the demand side, soya oil (that is cheaper than sunflower oil) is gaining demand from sunflower oil consumers who are price conscious. Rapeseed oil is also at a premium to soya oil. And finally, soybean oil has been gaining market share from palm in the crucially important Indian market. It is for all these reasons of demand, supply, and price that I hail soybean oil as the most lucrative oil for 2016.” – Dorab Mistry, Director, Godrej International (November 2015)
Soybean oil prices — which reached a 10-year low in September 2015 — have since recovered. Over the 2015–2016 cycle, industry experts have forecast an output of 51 million MT (5% Y-o-Y growth) of soybean oil, globally. As global supplies of soybean oil are likely to remain ample — primarily due to high output in the US and Argentina — prices are likely to be low, despite concerns over production losses in Brazil. Industry experts are expecting soybean oil to compensate for the stalling supplies of other vegetable oils (notably palm and rapeseed). Further, favorable policy changes in Argentina — the leading supplier of soymeal globally — are likely to encourage imports and exert further downward pressure on soybean oil prices.
“Soybean oil traded at $104/MT higher than palm oil in 2015. But that premium has narrowed this year to ~$90/MT, as soybean prices have dipped due to a bumper crop in South America. Such trends are likely to increase soybean oil consumption ahead of palm oil.” – Commerzbank (February 2016)
In 2016, factors such as the relative abundance of soybean oil, as well as the narrowing of its price premium vis-à-vis palm oil, are expected to support demand in global markets. If the price spread between the two oils continues to decline, the industry is likely to witness robust imports of soybean oil. However, low demand from China is likely to partially offset higher soybean oil demand globally, over the year.
The Smart Cube estimates soybean oil prices to fall 6.4% Y-o-Y to an average of ~$677/MT in 2016 — a rise of ~0.2% from January 2016.
“Despite larger than expected production in Canada, world supplies of rapeseed will still decline sizably in 2015–2016, primarily as a result of crop losses in the EU, Ukraine, China, Australia, and India.” – Thomas Mielke, Executive Director, ISTA Mielke (January 2016)
World rapeseed production for 2015–2016 is forecast to decline ~6% Y-o-Y to reach 67.5 million MT, primarily due to lower output from India and Australia. As a result, global rapeseed oil production is expected to drop 4% Y-o-Y to reach 26 million MT in 2015–2016. Consumption is likely to remain stable at 26.8 million MT, while ending stocks are projected to plunge 24% Y-o-Y to 2.7 million MT. As a result, rapeseed oil prices are expected to rise marginally in the coming year. According to The Smart Cube’s estimates, prices are forecast to inch up 0.7% Y-o-Y to an average of ~$780/MT in 2016.
Over the 2015–2016 cycle, global sunflower oil production is forecast to rise 1.3% Y-o-Y to a bumper output of 15.1 million MT, while imports are likely to soar 5.9% Y-o-Y due to increased demand from countries like India. Ending stocks are likely to decline 15.0% Y-o-Y. The expectation is global sunflower oil prices will rise significantly in 2016.
“We must keep our fingers crossed that Ukraine and Russia will again produce big sun seed crops in 2016. Currently it appears that the 2015 crops just harvested have been better than previous lower expectations.” – Dorab Mistry, Director, Godrej International (November 2015)
Key Strategies Adopted by Buyers
Establishing Futures Contracts at Low Prices
The rising price of vegetable oils — a key raw material in personal care and packaged food products — means bad news for large FMCG manufacturers, such as Unilever, Procter & Gamble and Nestle. Large buyers and traders typically hedge such commodity risks by locking prices through futures contracts to reap the benefit of lower input costs over a longer period. Industry players are already adopting this strategy — the volume of open positions (refers to the total number of active or outstanding contracts) for Malaysian palm oil futures on the Bursa Malaysia Derivatives Exchange reached an all-time high in August 2015, when palm oil prices were at their lowest (since January 2015).
"CPO is well held at current prices, and traders are hedging on that. It is going to be difficult for it (spot CPO prices) to come down (to this extent in the future).” – The Star Online (January 2016)
“We have accelerated sales of palm oil for shorter-term delivery, selling into the rising market, and have now priced 94% of our expected output for this year, compared with 63% in late August, implying that 31% of the crop was hedged in two months.” – Sipef (October 2015)
Stocking Up Inventory
As per demand forecasts, large buyers can look to purchase vegetable oils in bulk at low spot prices to safeguard themselves from price volatility in the coming months, while ensuring sufficient supply.
"The drop in production (of palm oil in Malaysia) is seen to be severe, and lots of refineries are already stocking up on crude palm oil. That is why prices are showing signs of recovery.” – Investing.com (January 2016)
2016 is anticipated to be a challenging year for the vegetable oils industry. Forecasts of rising prices, coupled with a highly dynamic business environment, present new challenges for industry stakeholders.
If you are a buyer of vegetable oils, the following questions are worth considering:
- How can you become immune to such price turbulences in the future?
- Under these circumstances, how will you formulate a buying strategy?
- How viable are vegetable oil substitutes for your company?
The Smart Cube regularly monitors this industry and has previously written two articles documenting it — The Story of Vegetable Oils in 2014 and Palm Oil Prices: A Slippery Turf Ahead. Subscribe to watch this space and stay abreast of updates in the vegetable oils space.