Bearish trend for vegetable oil prices

Demand slumps for biofuel-linked products, as a result of crude oil's sustained slide; 2015 likely to remain so

The sustained fall in crude oil prices has kept soybean, maize and crude palm oil under severe pressure, on steep reduction in their demand as feedstock for biofuels.

The benchmark Brent crude fell by 53 per cent in the past year, to trade currently at $49.37 a barrel. The fall has hampered the biofuel programme in many countries including India, Malaysia, Brazil, America and China. At the peak of crude prices, these countries had introduced intensive programmes to use the green fuel as a substitute to fossil fuels, to reduce the exchequer’s burden and to promote a better fuel for environment protection.

Indicating lower demand, the price of crude palm oil fell 26 per cent to ringgit 1,914 a tonne on September 2, 2014, recovering later in the year to ringgit 2,341 a tonnne on withdrawal of export duty by both Malaysia and Indonesia, the world’s two largest producers.

“Both Indonesia and Malaysia have failed to implement their palm biodiesel mandates. When producer countries fail on mandates, it becomes very difficult to support prices. We also have the biggest soybean crop in history, likely to be harvested shortly in the US. The market has also realised that discretionary biodiesel demand is very small in relation to the total amount of biodiesel consumed worldwide. As much as 80-90 per cent goes under mandates,” said Dorab Mistry, Director, Godrej International.

India’s sugar sector, which produces ethanol as a by-product, will also face a challenge in implementation of the government’s biofuel policy, which made five per cent blending of the fuel with petrol mandatory since January 2013. India has achieved less than two per cent of the blending target, due to uncompetitive price offers by oil marketing companies, which have already indicated they’re going slow on procurement of ethanol due to falling crude oil prices.

Both soybean and corn (maize) prices also fell sharply but regained partially to end the year 2014 with a decline of eight per cent and 13 per cent, respectively.

“At least 60 countries have developed biofuel policies. It will be the market rather than policies that will drive the development of the sector,” said a study by the Food and Agricultural Organization of the United Nations, chaired by noted Indian agricultural scientist M S Swaminathan.

A recent Rabobank report forecasts commodities linked to biofuel will continue to remain under pressure in 2015. The report says soybean will average 970 cents a bushel (a bushel is 27.22 kg) in the January–March quarter, a steep decline from 1,357 cents a bushel in the corresponding quarter of the previous year.

“The recent plateau in biofuel demand — driven by slow growth in mandates and the low crude oil price, combined with a reduction in global import demand — will allow worldwide supply of grains and oilseeds to outstrip demand in 2015,” the report said.

However, the projected lower price levels through 2015 also provide a great incentive for consumption to exceed the forecast levels. China’s import demand will continue to be one of the most important variables for many agri commodities markets, it added.