September 24, 2007

 

Strong exports fuel soyoil futures to 23-year highs

 

 

Amid the hoopla surrounding the anticipation of increased soyoil usage for biodiesel, strong export demand in the 2006/07 marketing year has been a key driver in the soyoil futures rally to 23-year highs.

 

The US Department of Agriculture reported Thursday (September 20) that accumulated soyoil export commitments for the 2006/07 marketing year totalled 680,000 tonnes as of September 13, up 83 percent from the 372,000 at the same time last year. Most of the sales have been exported, with 589,000 tonnes shipped, up 84 percent from the previous year and well above the five-year average of 488,000 tonnes, according to the USDA.

 

A culmination of various factors is behind the torrid pace of soyoil exports, analysts said. Soyoil's price - even at 23-year highs - is favourable when compared to its main competitor, palm oil. Chinese demand for vegetable oils is another support and on the supply side, soyoil was helped by a slow down in Argentina's crush, declines in European oilseed production, analysts said.

 

The market saw a big increase in actual shipments in the month of August and the USDA raised its export forecast in the September supply and demand report as a result, said Anne Frick, senior oilseed analyst with Prudential Financial in New York.

 

USDA slashed 2006/07 US soyoil carryout to 2.580 billion pounds from 3.060 billion in August and cut 2007/08 soyoil ending stocks to 1.735 billion from 2.225 billion last month in its monthly supply and demand report. The drop in 2006/07 soyoil stocks reflect increased domestic use for biodiesel and higher projected exports, USDA reported.

 

"It doesn't take much of a cut back anyplace to have a large impact on US soyoil exports, as our exports are so small as a portion of the world today," Frick said.

 

One of the key factors shaping demand for US soyoil was its unusual competitiveness with palm oil, Frick said. Palm oil usually trades at a deep discount to soyoil, but due to demand coming in much faster than expected, palm oil prices spiked higher in 2007.

 

The competitiveness of soyoil prices to sunflower oil, and rapeseed aided demand as well, analysts said.

 

European weather this summer was harsh on crop development. While best known for the impact on wheat, European rapeseed production was also hit. That comes on top of strong mandates for biodiesel, which caused a sharp rally in oilseed prices, said Bill Nelson associate vice president A.G. Edwards and Sons in St. Louis, Mo.

 

World users seemed to be unwilling to take the risk of holding out for southern hemisphere crops, with demand from China rising as they slowed down their crushing activity and instead imported more soy products, Nelson said.

 

The blue ear disease epidemic in China's hog herd slowed their crush, as liquidated and dead pigs reduced China's need to crush for soymeal and subsequently led to smaller domestic soyoil supplies, analysts said. In turn, China increased its imports of soyoil, analysts added.

 

Blue ear disease is also known as porcine reproductive and respiratory syndrome, or PRRS. It is highly infectious viral disease that may be transmitted by direct contact from hog to hog; through semen; possibly able to travel extended distances via aerosols and through birds, insects and rodents from farm to farm. The epidemic in China produced estimated hog losses of 500,000 to 2 million pigs, while China's official government estimates projected losses of 70,000 pigs from China's half billion pig population.

 

In August, China imported 260,000 tonnes of soyoil compared to 63,000 tonnes a year ago, according to preliminary data, Nelson added.

 

China has seen a rapid economic expansion and based on improved diets around the world more countries are using vegetable oils, Nelson said.

 

"Cheaper ocean freight rates also spurred robust exports this year. Freight rates have been cheap for all types of vessels in comparison to bulk freight, and when you add soyoil as the cheapest vegoil in the world this summer, demand flourished," said Dan Cekander, analyst with Fimat Futures in Chicago.

 

The market probably won't be able to maintain 2006/07's strong export pace in the next marketing year, as palm oil will trade at a discount to soyoil once supplies rebuild and Argentina's cut back in crush rationed supplies, said Frick.

 

Argentina's crush capacity was trimmed by one-third from June to the first half of August, amid a government mandate to force industries not to use scarce energy resources for eight hours a day. The government attempted to funnel scarce energy to residential consumption amid a colder than normal winter.

 

The USDA is probably on the right track for a reduction in soyoil exports in 2007/08, Frick added.

 

USDA estimated 2007/08 soyoil exports at 1.300 billion pounds, down from the 2006/07 estimate of 1.850 billion.

 

"Looking at the 2007/08 balance sheet, you have to wonder how much soyoil will be available for export amid perceived tight supplies," Frick said.

 

The market has rallied anticipating biodiesel will tighten up the balance sheet, particularly with only the fourth decline in the past 25 years in world annual production of oilseeds, Frick added.