Russian-Ukrainian Unrest Causes Global Oilseed Market Instability

Words: Crush

Worldwide, supplies of vegetable oils are still constricted, primarily palm oil, soya oil and rapeseed oil. The market is struggling to bring supplies to levels where demand can be satisfied. This created a very bullish trend in 2021, which based on forecasted trends will start to show relief in mid-2022 leading into the end of the year. There are a number of contributing factors which have and will continue to affect the global oilseed market.

Prices of agricultural commodities are skyrocketing, driven by key factors:

  • Significant drought losses in Soybeans and other crops in South America.
  • Low stock of Palm in Malaysia due to workforce constraints with COVID in 2021.
  • Export controls in Indonesia on Palm, with the introduction of the Domestic Market Obligation (DMO) to bring down domestic prices by limiting available oil for export.
  • Lower crops of Palm oil from Thailand and central America.
  • Poor canola crops in Canada in 2021 who is still recovering from drought season
  • A critical shortage of sunflower oil as exports from the Black Sea has stopped, which accounted for 60% of the world’s sunflower oil output.

Affects of Russian-Ukraine Unrest on Global Oilseed Market

The knock-on effect of the war between Russia and Ukraine is that the EU and many other countries are now curbing sunflower oil usage, which is boosting demand for other vegetable oils. Importing countries, of which South Africa is a nett importer of vegetable oils and fats, can now only partly substitute with products from other countries.

In the short-term, the global market cannot replace the loss of Black Seas vegetable oil exports and without sizeably reducing oils and fats consumption in the energy sector, there is going to be a significant shortage of edible oil. The expectation is that biodiesel targets are going to be adjusted down in US to free up veg oil pressure and curb food inflation, and potentially EU will follow suite, which could assist in stabilising supply pressure.

The sanctions placed on Russia is also contribute to extremely volatile and record high prices of rapeseed meal in Europe, with Russia being responsible for a third of EU rapeseed meal imports so far this season.

This will have a significant impact on animal feed costs along with the already lower available Soya meal in the market. Droughts experienced in South America and Canada is going to have a knock-on effect within the Meat and Dairy industry.

The Ukraine and Russia accounts for a significant portion of the fertiliser industry in the EU thus also having a direct input on the availability and input cost of new agricultural products going into 2022 and 2023, depending on how long the insurgence lasts.

Ukraine also accounting for the largest exporter of high oleic sunflower oil, will also lead to a worldwide shortage, as well as volatile pricing. Production facilities haves already been called Force Majeure, which is going to lead to supply shortage.

global oilseed market - canola

Canadian Droughts

Canada is coming off a very poor season due to drought, which led to record low canola crops. The new harvest although expected to be better, weather permitting, will still lead to a lower disposal in Feb/July 2022, reducing the total volume processed or exported to a 9-year low this season. Ukraine/Russia being one of the largest Rapeseed exporters from the Black Seas, is going to significantly affect the supply of the commodity to the international market.

The supplies of Canola/Rapeseed are tight, and the higher consumption of rapeseed oil will lead to an immediate price response, record highs have already been seen coming through.

General Oil Production

The production shortfall anticipated for soyabeans worldwide will more than offset increases in other oilseeds this season. World production of 7 oilseeds were at 574,3 MT thus 1.9 MT lower than last season, contrary to earlier expectations of a sizeable increase. (This now does not include any export/import sanctions and/or limitations from oil out of Russia and Ukraine – which are both high producing countries of both Rapeseed and Sunflower oil)

World consumption of oilseeds is estimated at roughly 590 MT, global production deficit will enforce a steep decline in world stocks. This will stimulate potential plantings for 2022/23 but will require good weather conditions to increase production and yield in both Canada/USA, Ukraine/Russia, and EU.

Rapeseed and Canola Oil

The significant expansion in winter rapeseed sowings is setting the stage for a further increase of EU production in 2022. Similarly, larger crops are expected in Ukraine and Canada to replenish the current tight world supplies of rapeseed and Canola in 2022/23. The impact of Russia invading Ukraine and the impact on exports as a whole is yet to be seen and costed into the market.

Soya Oil

Soyabean futures prices are set to appreciate to new highs on more severe production losses in South America and a widening of the global production deficit. World stocks of soyabeans will be reduced to a 6-year low coming into the end of August 2022, lower than 2021 during the same period.

Insufficient South American supplies has raised the global dependence on US soyabeans already in Mar/Aug 2022 and even more so in the coming Sept/Jan 2022/23 months. A significant amount of soyabeans were lost in the South Americas during Dec 2022/Jan 2023 with the worst droughts in history being recorded in certain Brazilian states. Similarly, this drought damage to both Paraguay and Argentina.

The market will be very sensitive to crop forecasts driven by weather conditions into spring plantings in North America as well during the growing period of ped-setting and filling in Aug.

Sunflower Oil

Larger sunflower supplies are moving into the international market, coming off a year-on-year decline of sunflower seed crushing. Importing countries are stepping up purchases due to the competitiveness of sunflower oil pricing in the complex.

At the end of December, farmers were still sitting on record supplies of sunflower seed in Ukraine and Russia, these countries have just become more active sellers. The current Russian invasion of the Ukraine has already seen exports being blocked, which is going to heavily impact supply in 2022, another reason for global oilseed market supply interruptions.

Palm oil

Palm Oil has lost market share globally due to declining yields and insufficient production.  Indonesian palm oil prices are skyrocketing to new highs, caused by a disruption of exports. This is leaving consumers in a difficult situation struggling to find substitutes. The Indonesian government expects to control palm oil exports and to introduce the Domestic Market Obligation to bring down domestic prices by limiting available oil for export- this was adjusted from 20% to 30% in March 2022, which led to further export limitations.

South African Impact

South Africa is a nett importer of vegetable oil and fats. The country is also heavily reliant on Soya Meal being imported, predominately from South America.

Traditionally the lowest cost oil used to be palm oil, and palm oil is used in a lot of snack manufacturing. The supply constraints are causing the pricing of Palm to has skyrocketed, which will lead to the manufacturing market seeking “cheaper” alternatives – which under current market conditions is not available.

Soyabean Oil is trading at a significant premium for the last 3 months, which traditionally is the “cheaper” vegetable soft oil. This is going to have a high inflationary impact on the consumer product market and in the wholesale oilseed market effects

The forecast of the local Sunflower crop on the field is looking very positive for a good crop, weather permitting. This crop is expected to be harvested in April/May, meaning that local production will increase and would decrease some reliance on imports. As RSA is still a nett importer of sunflower oil, meaning the pricing in the local market will still be linked to import parity pricing. There might be some discount locally, but the demand internationally will pull pricing up as export will be a very attractive option – unless the pricing is in balance.

Canola has seen a good crop in 2021. The demand has however increased over the last few years, bringing the Supply and Demand into balance. The expectation is that with the shortage of other vegetable oils the demand for canola is expected to increase both locally and internationally. The pricing has seen significant increases in the last 3 months again, driven by a supply shortage and now panic setting in due to the vegetable oil oilseed market

Total South African oilseed production is expected to increase by 7% year-on-year, driven strongly by the sunflower crop. Sunflower stock to usage has declined in the last few months, leading to more reliance on imports from the EU. The impact of the crude oil price is going to have an impact on world shipping costs, and if the war continues and the Supply and Demand being is out of balance the import/export costs is going to be driven upwards.

In summary, the demand for all oils and fats is growing, with supply both locally and internationally under pressure, the pricing is going to be seen moving anything from 10-30% within the next month, and the sustainability of the levels will be determined based on the international macro-economic conditions. Supply is going to be a constraint and crushers/refiners are basing all pricing and volume commitment based on raw material availability – and enquiring and managing stock coverage in short term will be critical.

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