Oilseeds: December quarter 2020
Increasing world oilseed prices reflect recovery in demand
Oilseed demand and prices bounced back after a sharp decline at the start of the COVID-19 pandemic and have maintained upward momentum since April. Recovering global demand is outstripping supply despite higher production and high carry-over stocks. This is expected to support prices for the remainder of 2020–21.
The world soybean indicator price is expected to increase by 26% to US$438 per tonne in 2020–21. The Australian canola price is expected to return to export parity following consecutive years of drought-affected production, falling by 4% to AU$593 per tonne in 2020–21.
Increased soybean production to boost global oilseed production
Global soybean production is expected to reach record levels in 2020–21, an increase of 8% year-on-year. This is the 6th year of record production in the last 10 years. Despite unfavourable conditions in some key growing regions, US soybean production is on course to rebound in 2020–21 to 113 million tonnes. This follows a fall in production in 2019–20 in response to reduced Chinese import demand associated with trade disputes and outbreaks of African swine fever. Soybean production in South America is also forecast to increase in 2020–21, to 51 million tonnes in Argentina and a record 133 million tonnes in Brazil. This is despite dry La Niña conditions during planting affecting production in Argentina and southern growing regions of Brazil. Strong Chinese import demand for soybeans is expected to reduce global soybean stocks by 9% to 86.5 million tonnes, the lowest level since 2015–16.
Reduced world supply leading to higher canola prices
World demand for canola is expected to outpace supply, leading to reductions in stocks and higher prices in 2020–21. A year-on-year decline in canola production in Canada and Ukraine is expected to lead to a contraction in exports. Canola production in the EU is expected to remain low due to persistent dryness in major growing regions.
Food demand for vegetable oils to remain stable
World food demand for vegetable oils is expected to rise by 2% in 2020–21 to 154 million tonnes, mainly due to recovering demand in Asian markets. Growing demand for vegetable oils overall and a substitution away from canola oil will result in strong soybean oil and palm oil consumption. The rapid recovery of demand and prices indicates that vegetable oils are a staple good. This suggests that food demand for vegetable oils will continue to grow in line with population growth and urbanisation, with demand largely unresponsive to changes in consumer incomes. New rounds of COVID-19 lockdowns in Europe are unlikely to have significant adverse effects on world consumption because household demand for cooking oil is replacing restaurant demand.
Biodiesel demand expected to partially recover
Industrial consumption of vegetable oils is forecast to increase slightly by 3% in 2020–21 to around 52 million tonnes, partly due to an expected increase in demand for palm oil for biodiesel production in Indonesia. Crude oil prices contracted sharply at the start of the pandemic but increased after an April 2020 OPEC+ deal to restrict production, making biodiesel more competitive. However, crude oil prices are forecast to remain lower than pre-pandemic levels into 2021 (see Economic overview). Renewed COVID-19–related restrictions in Europe are likely to constrain the recovery in biodiesel demand due to lower demand for transportation fuel. Global biodiesel consumption is likely to remain subdued because of ongoing travel restrictions, reduced income growth and lower economic activity.
China to lead global feed demand
Livestock feed use is expected to continue recovering into 2021 as China's pig industry more successfully contains African swine fever and rebuilds its pig herds (see Sheep meat and Beef and veal). The increasing use of protein meal for stockfeed is expected to increase soybean and canola demand. China's strong import demand is boosting global soybean trade. China has sourced record volumes of soybeans from Brazil in 2020, assisted by a weak Brazilian real. Brazilian soybean prices remain higher than US soybean prices due to tightening crop supplies in Brazil and dry conditions causing planting delays. Since Brazil's marketing year has ended and the US marketing year is underway, Chinese demand for US soybeans continues to increase, driving a recovery in US exports. Large purchases of US soybeans by China are projected to continue into 2021, increasing the likelihood of China meeting soybean purchasing targets as part of the phase one trade deal with the United States.
Australian canola exports to recover with increased production
Following 3 consecutive years of drought-affected production, Australian canola production is forecast to increase by 59% in 2020–21 to 3.7 million tonnes – 12% above the 10-year average to 2019–20. This rebound reflects improved seasonal conditions, particularly across eastern cropping regions (see Seasonal conditions). With increased production, the domestic price of Australian canola is forecast to fall, returning to export parity in 2020–21.
Australian canola exports are forecast to increase in value and volume in 2020–21 on the back of production increases. Australian canola exports are expected to rise by 71% to 2.7 million tonnes in 2020–21, predominantly going into the EU biodiesel market. Australian canola is expected to regain some of the market share lost to Canada when production was significantly below average in 2018–19 and 2019–20. Australian and Canadian canola are competing in the drought-affected European market. However, Australian non-GM canola is projected to maintain its price premium because of its secondary value as non-GM meal in Europe's dairy industry.
Opportunities and challenges
Uncertainty surrounding EU demand for Australian canola
The European Union is a significant importer of Australian canola for biodiesel production. EU demand for canola is based on the Renewable Energy Directive that ensures feedstocks used to produce biodiesel meet greenhouse gas emissions thresholds. EU renewable energy rules are being re-assessed as part of the European Green Deal initiative to increase the EU's emissions reductions target by 2030. Subsequent revisions to the Renewable Energy Directive could result in tightened regulations and lower lifecycle emissions thresholds. These policy changes could boost Australian canola exports due to the industry's commitment to research that demonstrates low lifecycle emissions.
The Australian canola industry is likely to face intensifying competition in the European biodiesel market. Canada is likely to be a lower cost producer and could outcompete Australian canola despite the lower value of non-GM meal. Australia is therefore at risk of not winning back the full market share ceded to Canada over the past 3 years. Continued innovation and diversification should support Australian canola producers in maintaining their competitive advantage and access to the EU market.
Markets functioning well in an uncertain environment
Oilseed prices are often responsive to a wide set of macroeconomic and market forces and are naturally volatile. After initial uncertainty in March when measures to control the spread of COVID-19 were introduced and after crude oil related price volatility, price formation in markets has responded to supply and demand factors. This indicates that markets are functioning well. Measures of short-term volatility – for example, on soybean spot prices – remain historically low, fluctuating throughout 2020 with expected changes in global demand and supply balances.
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