CHICAGO: Soybean oil may have been overlooked lately in the grains and oilseed arena as drought-hit crops hogged most of the limelight. Even soy meal — soyoil's product counterpart in the soy crush — has had a far higher profile of late as that protein-rich feed ingredient scaled record heights.
But soyoil's time to shine may be coming. Already-tight oil reserves stand to be further depleted as dwindling U.S. soybean supplies threaten to curtail fresh soy product output in the months ahead just as the global demand rate typically picks up.
Two factors have served to weigh on global soybean oil prices so far in 2012.
The primary bearish issue within the United States has been the relentless demand for soymeal, which has helped steer meal values to all-time highs and promote strong crushing rates among U.S. processors attempting to capitalize on the red hot meal market. This brisk crushing pace has resulted in steady increases in soyoil output as part of the crushing process, which has served to top up soyoil inventories even as oil prices struggled to gain upside traction over the opening half of the year.
Internationally, abundant palm oil inventories across Asia have helped suppress overseas soyoil demand throughout recent months, resulting in the slowest US export pace of the oil in more than five years.
While blistering soymeal prices continue to spur strong crushing activity in the United States, declining reserves of soybeans across the Americas looks set to force a slowdown in overall soy processing in the months ahead.
This is especially likely if the historically hot and dry conditions across the US Midwest during the month of July are found to have curtailed overall US soy output this year. And any subsequent lowering in soy product output will serve to underpin soyoil values towards the end of 2012.
Overseas, continued high palm oil output looks likely over the near term in Malaysia and elsewhere to extend the rising trend in palm oil inventories in that region.
But global crop forecasters are already worrying that an El Nino weather pattern appears to be forming in the eastern Pacific that may impact palm oil production in Asia later this year, should the traditional El Nino-led dry conditions set in across key Asian growing regions.
Elsewhere, concerns are growing over the extent of the Canadian rapeseed crop which endured spells of hot and dry weather during critical developmental phases that may impact overall yields come harvest later this month. Any confirmations of notable yield loss will likely quickly translate into firmer canola prices, especially in overseas markets which heavily rely on Canadian shipments for the oil.
Similar concerns are forming regarding India's oilseed output potential after a slow start to the monsoon season, which typically brings roughly 75 percent of the country's total rainfall. So far, rains in the key growing regions are roughly 17 percent below normal, so any continuation of a dry trend stands to curtail output of one of the world's top producers of both canola and soybean oil.
Should these output cutbacks materialize, the combined effect is likely to be a drawdown in global edible oil inventories as we approach the latter months of 2012 - which is typically when China, the world's top consumer of veg oils, picks up its purchasing pace of soybean and other oils to coincide with the U.S. soy crop harvest.
And if China opts to increase soyoil purchases beyond its usual rate in order to make up for the shortages in supplies seen from South American growers earlier this year, such buying interest could quickly create a sense of urgency and tightness in the global soyoil market that up till now has been one of the calmest members of the global agricultural commodities arena.
Further, given that American and global soybean oil stocks-to-use ratios have already been trending lower lately on the back of growth in global demand, any additional declines in output of alternative edible oils such as palm oil and canola will only stand to ratchet up interest in soyoil even higher.
So while soyoil has rarely featured on trader radars so far in 2012 as other markets have boasted far more interesting fundamental stories, declining US soybean output just as China is set to pick up its veg oil purchases could well serve to ignite this market as we enter the final months of the year.
— Gavin Maguire is a Reuters market analyst. The views expressed are his own.
