The global oilseeds market: How big players, with even bigger demands, are driving food inflation

Combine harvesting canola crop

The future of the oilseeds market has never been more captivating. Global demand for oilseeds – soybeans, canola and palm – is coming from China, North America and Europe concurrently. This growth in demand is driven by three key forces within these regions:

  • The recovery in China’s hog herd and restructuring of its hog industry
  • A renewed push for alternative fuels in North America
  • The move away from palm oil in the EU

These big players will simultaneously create volatility and growth within the market, including in the price of food at a global scale. While global economies look to recover from the impacts of Covid-19, the US Consumer Price Index (CPI) has risen by 4.2% year on year. This is the fastest increase in the annual CPI rate since September 2008.

While the price of energy and automotive vehicles has risen, the most significant and notable rise is in food prices. The Food and Agriculture Organization’s (FAO) food index price, measuring changes in the price of cereals, oilseeds, dairy products, meat, and sugar, jumped from an average 108.6 in December 2020 to 113.3 in January of this year.

The FAO attributes this primarily due to the rise in the cereals, sugar and vegetable oils markets, with the vegetable oil price index at its highest since May 2012 and cereal soaring by 42.3% above its level a year ago.

There is a bullish tone to the current oilseeds market because of strong demand for the soybean crop in the US and tighter supplies coming out of Argentina due to adverse weather conditions. Oilseeds prices are being pushed higher by China’s demand for imports; the resulting rise in food prices globally cannot be ignored.

Our analysts cannot help but ask the question: in a volatile market, who will come out on top?

Combine grain tank with falling soybeans

China’s epic buying power
China is a large buyer of many agriculture commodities, typically auctioning old soybeans out of state reserves and replacing them with new imports. During the height of the Covid-19 pandemic, China used its reserves to damp down prices but is now looking to build back up its domestic reserves.

In April 2021, shipments of US soybeans reached 59 million tonnes, of which China accounted for 35.8 million tonnes (or 60%). The rapid recovery of China’s pig industry is the main driver for global animal feed demand, which is why total export sales commitments are reaching record highs.

Fastmarkets AgriCensus reporter Eduardo Tinti also reported in May 2020 that 73% of Brazil’s record 17.4 million mt of soybeans were exported to China. States Mato Grosso and Sao Paulo were the two main origins of the 12.6 million mt cargos bound for China.

China’s hog industry has transformed from an industry with many smaller farms where pigs ate very little soybean meal to one where hogs eat huge rations that contain more soybean meal, so more soybean per hog is required.

This comes while China is also recovering from its African Swine Fever (ASF) outbreak in 2019. The severe outbreak slashed the pig population by a third. In 2019, China’s pig herd sat at only 310 million head, a huge decline from 428 million head in 2018. This rapid decline meant demand for soymeal and soybeans contracted – but demand is now rebounding.

Can supply keep up? And, just as importantly, is another outbreak of ASF on the horizon?

Can the US keep up with foreign demand?
The US soybean market has the strongest demand from China where the soybeans are crushed to produce meal.

“The US market saw a surge in shipments to China in 2020/21 due to the Phase 1 agreement (the end of the trade war), recovery in hog numbers and delay in Brazilian planting, which meant the Brazilian export window opened later than usual,” The Jacobsen principal analyst Tore Alden says.

With Chinese demand especially high and US supplies already tight, CBOT US soybean futures prices have soared to near-seven-year highs.

Monthly soybean oil future data

Keeping up with US domestic fuel demand
As well as demand from China, the US needs to match its own domestic demands for oilseeds, which is amplified by fuel demand. Soybean oil values continue to rise, reflecting growth in the US biodiesel industry.

“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 says. “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 to provide a solid foundation for the future.”

Talks of a clean energy revolution have included the possibility of the US federal RFS program being updated to resemble the California Low Carbon Fuel Standard (LCFS) and its use of carbon intensity scores and credit/deficit generation to bridge the gap to zero-emission vehicles. California is by no means a reflection on what exactly to expect within the wider domestic market – but it is a driver for change.

Consumers and businesses are also restocking following Covid-19 lockdowns, adding to the steep recovery in edible oil demand. This demand for edible oils could result in a tightening of global supplies.

The CEO of Bunge Ltd, Gregory Heckman, referred to the renewable diesel expansion as a “structural shift” in demand for edible oils. US soybean oil could demand outstrip production by as soon as 2023 if the US renewable fuels industry continues to grow at such a rate.

Palm oil and the EU
The issues surrounding palm oil must be examined when discussing oilseeds demand. There is a growing awareness among consumers of the severe and concerning environmental impacts of palm oil production. Public perception is turning increasingly negative for what is a huge and global market, particularly in Indonesia.

In response to this backlash, the EU is taking steps to ween its markets off its supply of palm oil. As a power player in this market, the EU is also able to address issues around sustainability and environmental protection.

Fastmarkets Agricensus reports imports of palm oil into the EU and the UK during the 2019/20 marketing fell 12% year on year due to a slump in demand. European imports of palm oil sank to 5.71 million mt, with demand from the biodiesel sector clearly shifting to other vegetable oils. With more stringent sustainability requirements coming into play in the EU, we can only expect a further decrease in palm oil imports.

Irrigation system on soybean field

The future of the oilseeds market
Oilseeds is a market with a particularly uncertain future – especially while demand from China continues to grow and EU regulations mean a further move away from palm oil for the European market.

This comes while food inflation and rising food prices make headlines. 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 towards goods over services. Though this price rise is the most significant in the last 12 years, it is transitory. While the base effects will probably mean annual inflation gets even higher in the months ahead while supply chains adapt, the jump will level out.

Even so, we must consider the impact on both the commodity markets themselves, as well as the global economic outlook and recovery post-pandemic, particularly for those in vulnerable households and lower-income countries. When pairing food price increases with reduced incomes (like those experienced for many throughout lockdowns), the World Bank said this aggravated situations of chronic and acute hunger for those at risk in almost every country.

If we can expect demand for agricultural commodities including oilseeds to continue to rise, we must also consider the question of how this will play out for food prices in the years to come. More importantly, how will this affect the world population and those already experiencing food scarcity?

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Fastmarkets Agriculture brings together the expertise and insights of senior analysts and price reporters from AgriCensus and The Jacobsen. From forecasting and analysis, to market news and research reports, we are combining the strengths of two businesses with undeniable expertise to cover the price data and trends for oilseeds, wheat, corn and more in the agriculture commodities markets.

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