Daily Times

The global vegetable oil market has been building strength since July, but some bearish factors are starting to nudge their way in.

Benchmark Malaysian palm oil futures for January jumped last week on currency and fundamental factors, but they have been weighed down by soy-based competitors, particularly Chicago-traded soyoil and China’s Dalian Commodities Exchange soyoil.

Multiple market-moving factors have been at play within the last week, including the US presidential election, the US Department of Agriculture’s monthly supply and demand report, monthly palm oil data from Malaysia, and Tuesday’s expected US soybean crush numbers. A stall in global vegoil production in 2015/16 has led to a considerable tightening in supply. Although this year’s output should rise 5 percent over last year’s, USDA projects 2016/17 stocks-to-use to fall to the lowest levels in 13 years.

The supply squeeze is by no means over, but could the excitement in the vegoil futures market soon be tempered by rising soybean inventories? Or will it require a potential rebound in palm oil output early next year?

The vegoil with perhaps the most price-supportive case at the moment is palm oil, particularly out of Malaysia, the No. 2 producer. Malaysian palm oil futures have been on the upturn since July. The rally has been assisted by the weakening ringgit, which has been sharply lower since last Wednesday. This makes palm oil cheaper for foreign buyers.

On Thursday, the Malaysian Palm Oil Board revealed both a smaller stockpile and weaker production numbers than the market had expected for the month of October. Production fell 3 percent below analysts’ predictions, while stocks came in 7 percent lower. The latter was bolstered by larger-than-expected exports.

These numbers are sharply lower than a year ago. Last month, Malaysian palm oil production was 18 percent smaller than October 2015, while stocks were down nearly 45 percent over the same time frame. Exports of the tropical oil were 16 percent lower on the year.

The USDA confirmed declining world palm oil reserves in its monthly supply and demand report last Wednesday. Global carryout for both 2015/16 and 2016/17 was revised downward by the US agency, and the latest figure for the current marketing year stands just half a percentage point above last year.

USDA’s projections suggest that in 2016/17, palm oil stocks-to-use will fall to 6.5 percent globally – the smallest such ratio since 1994/95 – but production is expected to increase 10 percent on the year. USDA left production numbers for palm powerhouses Indonesia and Malaysia unchanged from last month.

Whether bullishness in palm oil ends up being just a short chapter or a longer book depends partly on just how much the production recovers from last year, and that will ride greatly on weather.

Analysts from Malaysian firm MIDF Research interviewed last Thursday said further production declines were likely in November and December as a result of last year’s El Niño, but output could recover by March or April under a normal monsoon season, according to another trade source. Despite the tightening in palm oil stocks, it may prove difficult to sustain higher vegoil prices in the face of a monster US soybean harvest and the potential for South America to follow suit early next year.

USDA upped US soybean yields to a mind-numbing 52.5 bushels per acre last Wednesday, but it decreased domestic crushings for the 2016/17 marketing year by a half-million tonnes, citing expected weaker soybean meal demand. This seems like a logical conclusion based on the fact that export commitments are 18 percent behind last year’s pace as of Nov. 3.

But industry analysts are expecting that US soybean processors have crushed a record amount of soybeans in October, and preliminary confirmation of this could arrive in the National Oilseed Processors Association’s report on Tuesday at 11am CST.

Plentiful US crush activity may provide some short-term support for CBOT soyoil futures, but this momentum could quickly fizzle if the demand does not pick up throughout the marketing year, which began on October 1.

Falling global inventory of rapeseed and rapeseed oil, the third-most popular vegoil worldwide, has garnered the market’s attention in recent months, but any worries over a supply shortage may be starting to ease.