In after-hour trading on November 4th, soybean oil and palm oil on the Dalian Commodity Exchange managed to break through their strategic pass, of which palm oil went up by 3.7% under the drive of fund flow and its open interest surpassed that of soybean oil. After DCE opened on November 5th, the two oils remained overwhelming. In the morning trading, the Y2001 contract of soybean oil hit 6490 yuan/tonne, the highest level since March 31st, 2017; and the Y2001 contract of palm oil hit limit up at 5456 yuan/tonne, the highest since January, 2018. As of 1446 (UTC+08:00), the open interest of the Y2001 contract of soybean oil on the DCE total 865,640 contracts, and palm oil at 890,354 contracts. Actually, palm oil has been a better performer since February this year. 

 

Fig.: Soybean Oil on the DCE

Fig.: Palm Oil on the DCE

Indonesia and Malaysia are the global top producers of palm oil, accounting for 85% of all. According to latest statistics, Indonesia takes up about 56% and Malaysia about 28%. Indonesia planted 14.327 million acres of palm in 2018, with palm oil production at 40.567 million tonnes, according to its Central Statistics Agency. Weather plays a decisive role in production, and Indonesia has less and less rains since June this year, and almost least rains in July to September historically. The market has a more and more intensifying expectation of lower palm oil production. 

The Indonesian Biofuel Producers Association (APROBI) sees "very little" biodiesel exports in the first half of 2020 due to higher domestic consumption, vice chairman Paulus Tjakrawan said last Friday. The Association estimated domestic consumption of around 9.5 million kilolitres (KL) next year as Indonesia aims to start increasing the bio-content in biodiesel. This year's biodiesel exports is estimated to reach as much as 2 million KL.

Malaysia exported 1,532,237 tonnes of palm oil from October 1st-31st, a month on month increase of 17.5%; and it exported 1,243,981 tonnes from October 1st-25th, a month on month increase of 13%, according to AmSpec Agri. And according to SGS, exported 1,522,051 tonnes from October 1st-31st, a month on month increase of 14.65%; and it exported 1,202,650 tonnes from October 1st-25th, a month on month increase of 9%. 

In addition to dry weather, Indonesia is to carry out the  B30 mandate (a blend of 30% palm oil in biodiesel) from January 2020, a move that triggers concerns about supply shortages of palm oil. The rally in palm oil prices is set to accelerate as the new planted acreage will fall under unfavorable weather and palm oil production growth will drop to 1 million tonnes in 2020 due to decreased use of fertilizers, according to veteran industry analyst Dorab Mistry on November 1st. He predicted that Malaysian stockpiles may total 2.5 million tons by December, down from 3.22 million tons a year earlier, and benchmark futures could reach 2,700 ringgit/tonne by March. The market is thus bullish about palm oil, and the January contract of palm oil on BMD closed higher by 71 ringgit, to 2532 ringgit/tonne. 

Soybean crush: On the week ending November 1st, soybean crush declines at a higher-than-expected pace due to supply shortages, and as some mills have to limit or suspend production due to environmental protection in Qingdao and Rizhao, Shandong. Soybean crush at domestic mills totals 1,554,450 tonnes (meal 1,228,015 tonnes and oil 295,345 tonnes), down 195,500 tonnes, or 11.1%, from 1,749,950 tonnes in the previous week. Meanwhile, the operation rate (capacity utilization) is 42.88%, down 5.39 percentage points from 48.27% in the previous week. As some soybean cargoes arriving at domestic ports recently are for state reserves, rather than commercial supplies, some mills now have to suspend production. Therefore, soybean crush is predicted to stay at a high level of around 1.66 mln tonnes this week. 

Soybean oil stocks: Soybean oil stocks decline significantly due to lower soybean crush with strong trading after the National Day holiday. In the week as of Nov. 1st, China’s commercial inventory has totaled 1,256,550 tonnes, down 57,900 tonnes by 4.4% from 1,314,450 tonnes last week, down 93,250 tonnes by 6.91% from 1,349,800 tonnes last month, and down 593,450 tonnes by 32.08% from 1,850,000 tonnes of the corresponding period last year. And the five-year average at the same period is 1,365,200 tonnes. Mills now have a backlog of contracts in November and December. 

Fig.: China’s Soybean Oil Stocks in Recent Years

 

Chinese importers now are buying up on US soybeans due to good crush margins on the DCE, although the market is negative about the smooth progress in trade talks between the two countries. In the week ending November 3rd, US soybean crops were 75% harvested, the same as the market estimates, yet below the 81% last year and the five-year average of 87%. The delay in planting, the unfavorable weather during harvests and the trade disputes have brought huge losses to US farmers. And in South America, soybean planting is also delayed by rainy days. Brazilian farmers have just planted 46.9% of soybean crops, far below 61.6% last year and also below the five-year average of 49.2%, according to Arc Mercosul. Higher US soybean futures will lift the import cost to China. 

With stronger sentiment in the market, oil prices are predicted to extend the strengthening trend in China. But DCE margins for soybean crush have expanded to 240-290 yuan/tonne so far, so mills are importing soybeans and booking profits through meal and oil sales, which makes oils pare some earlier gains today. As of 1427 (UTC+08:00), the Y2001 contract of soybean oil is traded at 6374 yuan/tonne, and palm oil at 5386 yuan/tonne, an increase of 68 yuan and 138 yuan, respectively.