Vegoils and biofuels in 2022: What to expect?

Vegoils and biofuels in 2022: What to expect?

Vegetable oils on track to breaking production and export records in 2022, which could hinder the price rally. Biofuels and mobility, perspectives in a context of uncertainty.

Last year (2021) turned out to be a profitable year for the vast majority of vegetable oils. Both production and exports, as well as international prices, saw a bullish trend throughout 2021, and prospects for the coming year continue to bode well.

With a production estimation of 76.5 Mil MT, the 2021/22 season for palm oil would be the one with the highest production and exports on record. Indonesia and Malaysia continue to grow and are the heart of the world palm oil market. These two Southeast Asian countries continue to comfortably dominate global palm oil production, concentrating more than 80% of the total.

For its part, SB oil, a fundamental part of the main export complex of the Argentine economy, also shows optimistic prospects. According to the USDA, world production is expected to break the 60 Mil MT barrier. This would also lead to the season with the largest production and foreign trade of SB oil in history. The four largest producers continue to be China, the United States, Brazil, and Argentina, with the first three expanding their production. Beyond the rise in world oil consumption, uncertainty remains regarding the level of world production growth to meet this demand. If world production grows above consumption, it would also lead to less vigor in external markets.

Argentina would remain the leading exporter, reaching a 49% market share for the second consecutive year. This is in spite of a decline of close to 2.4%, projected for exports of Argentine SB oil for the coming season.

At a local level, the outlook for the Indian market, the main export destination for Argentine SB oil, is closely followed, which has bought more than 47% of the total exported in the last five years. With projections of increased production and stocks of SB oil in India, it is expected that this country will reduce its imports and in the 2021/22 season, Argentina will sell a smaller volume to this destination.

Back to the world production, records do not stop and sunflower oil is expected to reach maximum industrialization and commercial exchange at a global level. Harvests in Russia, Ukraine, and the European Union are growing and propping up sunflower oil balance sheets, contributing to an estimated global production of 13.3 Mil MT.

At the local level, Argentina cultivated the largest acreage since 2018/19, but the delay in planting in the North, and the modest rainfall in the main productive areas will present limitations to the harvest. As a consequence of this, a year-on-year drop in the volume of processed sunflower is estimated, although Argentina will try to take advantage of the great moment that prices are going through in the international market with its oil exports. In fact, to date, Export Permits (DJVE) of sunflower oil 2021/22 for more than 204,000 tons has already been recorded; the second-best level in records for new cargos at this time of the year.

On the other hand, the outlook is not so encouraging for rapeseed oil, which expects to drop almost 6% in production, reaching a five-year low. In the European Union, the main producer, and Canada, the main exporter, reductions of 5.4% and 22.7%, respectively, are anticipated in their production of rapeseed oil. Exports echo the production decline and expect to fall more than 13% in the 2021/22 campaign.

Among the vegetable oils that are produced in smaller volumes, that of peanuts finds Argentina in a prominent position. With a growth projection of over 33%, Argentina expects to end the 2021/22 season as the second world exporter of peanut oil. This way, it climbs to second place only behind India. Oil adds a dynamic to the Argentine peanut value chain, which has already been growing strongly in production and exports.

How is the oil price rally going?

With three consecutive years of rising prices for vegetable oils, Argentine FOB levels of SB oil accompanied, increasing above 33% year-on-year for the third year in a row, while FOB sunflower oil shows a year-on-year rise of 23%. Palm oil also rose more than 33% in the year, and the biggest jump is observed in rapeseed oil, which climbed 63% in just under twelve months.

Thus, Argentine SBO currently stands at around 1,360 USD/MT, and ARG SFO, barely exceeding 1,330 USD/MT. For its part, Malaysian palm oil is slightly above 1,220 USD/MT, while rapeseed oil broke its record and surpassed the 1,820 USD/MT mark. It should be noted that none of these oils exceeded a thousand dollars per ton at the beginning of 2020. Therefore, the global demand for vegoils has skyrocketed in the world pandemic context.

However, as Oil World recently highlighted, such high levels of prices don’t seem sustainable throughout 2022. Strong production and export rebounds expected in the coming season hope to be able to meet the sustained growth in demand. This gives off bearish signals for oil prices for the 2021/22 season. It is likely that the bearish has already begun, considering that from the end of October to December the prices of SB, palm, and sunflower oils accumulate decreases of 6.7%, 10.4%, and 4.5%, respectively.

For its part, a recent report by Rabobank Food & Agribusiness Research shows an optimistic outlook for the coming years in the world SB oil market. Investments of almost three billion dollars are expected in the United States to expand the SB crush capacity. The US production expansion aims to meet the high demand for biofuels.

However, it should not be overlooked that SB processing would also result in high production of SB meal, mainly from the United States. Without expectations of growth of the same magnitude in the demand for animal feed, an excess supply of SB meal could lead to a scenario of lower prices in the medium term, which would particularly hurt Argentina, a leading supplier of this by-product to the world.

More mobility, more biofuels

 

The advance of COVID’s Omicron variant and its effects on the economy will be key to analyzing the movement of people and goods in 2022. Despite the uncertainty regarding the evolution of the pandemic, the outlook before the start of the year is better than in the last two years.

Considering data up to October 2021, the volume of biodiesel exported by Argentina already exceeds 1.05 Mil MT. This means that the accumulated volume in the first ten months of the year shows the best export rate for the country since 2018. Not only that, but the improvement of international prices led exports to exceed USD 1,300 million, the highest level since at least 2014. The European market aspires to continue with a strong demand for Argentine biodiesel in 2022.

Furthermore, a 2022 scenario with more mobility of people aspires to increase the consumption of biodiesel even with the reduction of cuts in the new biofuels law. Beyond this, the consumption of diesel has been more inelastic compared to that of naphtha, which would support the demand for biofuels even in a context of less movement due to a worsening of the pandemic. However, we shouldn’t overlook that current scenarios continue to be affected by high levels of uncertainty.

With this said, it is expected that the commercial year 2021/22 will yield a total production of 1.55 Mil MT of Argentine biodiesel. Thus, a production level similar to that of the current season is projected, in a context of stronger levels of domestic demand, which would offset a slight drop in Argentine exports, from 1.16 Mil MT to 1.11 Mil MT. Considering the price average for the year 2021, biodiesel would contribute more than USD 1,346 million in exports in the coming season.

Completing the overview of biofuels, in the case of bioethanol, this market depends entirely on domestic demand. It is estimated that in the 2021/22 cycle the maize-based bioethanol industry will consume 1.4 Mil MT of grain, in line with what happened the previous business year. At the end of 2021, the price of maize bioethanol is set at 59.35 AR$/Liter. Unlike the values ​​fixed on other occasions that were minimum prices, the current official value is an acquisition price that has been in force since September. The price set in pesos is currently equivalent to 0.58 USD/Liter, showing some recovery after falling to a low of 0.40 USD/Liter in December 2020. In fact, the current value of biofuel is the highest for the year since December 2017.

Source: https://bcr.com.ar/

Photo: REUTERS/Stringer

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