The forward price of oil and fat may have a large downward space

Recently, there has been a clear correction in domestic oil and fat prices. The three major oil varieties have shown a synchronous downward trend, especially soybean oil and palm oil, and the main futures contracts have fallen by more than 6%. But on Friday, oil prices rebounded significantly. At present, from the main point of view of the market, the contradiction between bulls and bears is more obvious, and some bulls believe that the discount on futures prices is too large. From the spot situation, the current spot price of oil and fat is relatively firm, almost all varieties are in the back structure, soybean oil spot than January futures premium at 600-800 yuan / ton, palm oil spot than futures premium of 500 ~ 700 yuan / ton, especially considering the import price inversion problem, the cost of imported palm oil is still above 10,000 yuan / ton. From this point of view, it is true that there is strong support for the price of oil futures. However, if we analyze the forward factors, it can be found that although the January futures contract is stronger under spot support, the price of the long-term contracts such as May and September is under greater pressure, and the future trend is difficult to be optimistic.

First, the production of oils and fats represented by palm oil will continue to increase in 2022

According to the data released by the USDA, the total global vegetable oil production in 21/22 is expected to change the previous two years of production decline and is expected to increase by 8.21 million tons year-on-year. From the structural point of view, among the main oil varieties, in addition to the rapeseed oil due to the serious reduction in Canadian rapeseed production, other major oil varieties, including palm oil, soybean oil, sunflower oil are significantly increased. As the "big brother" in oils and fats, changes in palm oil production are the core factors leading to changes in global oil prices. The USDA estimates palm oil production to increase by around 3.7 million tonnes, while Oil World in Germany estimates are broadly similar: global palm oil production is expected to reach 80 million tonnes in 2021/22, an increase of 3.5 to 4 million tonnes year-on-year. Specifically, Indonesia (2020 data), which accounts for 60% of global palm oil production, is expected to increase production by 1.7 million to 2 million tons, while Malaysia, which accounts for 25% of global palm oil production, is expected to increase production by 1 million to 1.2 million tons. Judging from the situation in the main producing countries, it can also be roughly verified. According to information released by the Indonesian Palm Oil Association (GAPKI), Indonesian palm oil exports in 2021 were 33.38 million tons, down 1.85% year-on-year; Indonesian palm oil production was 46.62 million tons, down 0.87% year-on-year. It is estimated that Indonesian palm oil exports will be 34.44 million tons in 2022, an increase of 3.19% year-on-year; palm oil production in 2022 will be 48 million tons, an increase of 2.95% year-on-year. Although the expected increase in production in Indonesia's domestic data is not as high as before, the overall general direction is consistent.

Although Indonesia is more than twice as large as Malaysia in terms of production, due to the indonesian population of 270 million, which is 9 times that of Malaysia, Indonesia's own palm oil consumption is extremely large, accounting for 56% of the world's exports in 2020, while Malaysia's exports account for 33% of the world's total exports. Judging by the situation in Malaysia, palm oil production has begun to recover. In October, Malaysia produced 1.73 million tonnes of palm oil, slightly higher than the same period last year. This is the first time since April 2021 that production has turned positive year-on-year. In the first 10 months of 2021, Malaysia's total palm oil production was 15.03 million tonnes, down 8% year-on-year, and the decline began to narrow compared to previous data. From the perspective of exports, Malaysia's cumulative export volume in the first 10 months was 12.68 million tons, a year-on-year decrease of 12%. According to ITS data, as of November 25, Malaysia's palm oil exports for the month were 1.34 million tons, an increase of 11% month-on-month, and Malaysian palm oil exports also began to increase. For Malaysia, the reason that has continued to plague its production is the shortage of palm garden labor. The number of local workers in Malaysia is seriously scarce, and it is highly dependent on labor from Bangladesh, Indonesia and other countries: according to the data released by the 2019 MPP, there are a total of 337,000 workers in the Malay oil palm industry, of which more than 85% are foreign workers (mainly bangladesh, Indonesia, Myanmar, India), especially the harvesting and gathering workers, foreign workers account for more than 95%. After the outbreak of the epidemic in 2020, due to the serious spread of the epidemic in the above four countries, many foreign workers entered Malaysia and caused the spread of the epidemic in Malaysia, so due to the need for epidemic prevention and control, Malaysia tightened the entry restrictions of foreign workers. However, judging from the current situation, it has improved. In order to solve the problem of labor shortage in the plantation industry, on September 16, officials from Malaysia's Ministry of Human Resources specifically approved the introduction of 32,000 foreign workers for property use, and the policy for the training and reemployment of local workers in Malaysia was also announced.

As of December 1, the number of confirmed COVID-19 cases in Malaysia has stabilized at about 5,000 to 6,000 per day, india is about 10,000, and the number of cases in three major labor-exporting countries such as Indonesia, Bangladesh and Myanmar has fallen to about 500 (according to the standards of these countries, it is almost "cleared"). If this situation can be stabilized, the hypothetical fear of foreign workers spreading the epidemic in Malaysia is more severe than abroad, and it is clear that the hypothetical fear of the epidemic spread by foreign workers is no longer valid. Therefore, as far as the introduction of labor is concerned, although there may be some problems in practice, under the background of the initial control of the epidemic in Southeast Asian countries and the gradual increase in vaccination rates, the probability and speed of the resumption and increase of production in Malaysia palm orchards in the future are significantly increasing and accelerating. From the seasonal point of view of palm oil production, the first quarter is the low point of palm oil production, and correspondingly, exports are also off-season. Therefore, in the context of the current strong basis, if the arrival of palm oil in December is not very large, the downward decline of palm oil in January is limited; but for May, especially September, the downward pressure is still very obvious.

Second, it is difficult for tariffs and other issues to continue to support oil and fat prices in the high range

Export tariffs in Indonesia, a major producer, were also the focus of supporting higher palm oil prices. According to the Indonesian government's tax rules, if the price of crude palm oil is below $670 per ton, its export tariff is $55 per ton; if the price of crude palm oil is between $670-695 per ton, the tariff is $60 per ton; if the price is at $695-720 per ton, the tariff is $75 per ton, and for every $25 increase in the price of crude palm oil, the export tariff is increased by $15. From the situation in November 2021, Indonesia's palm oil export tariffs have reached as high as 200 US dollars / ton. Given indonesia's oligopoly position of accounting for 60% of global production and exports accounting for 55% of global total exports, this decision on the one hand raises the cost of palm oil exports, making Indonesian palm oil export prices less competitive relative to Malaysian palm oil. B.V. Mehta, executive director of the Indian Solvent Extractors Association (SEA), said that the share of Indonesian palm oil imported by India fell from nearly 70-75% to 55% in January-September this year due to higher export taxes and special taxes imposed by Indonesia in the past year, while Malaysia's share soared by 45%. That said, on the other hand, Indonesian tariffs have made the impact of Malaysian palm oil production on the market even greater. Indonesia's tariff problem is actually caught in a positive feedback cycle: the price of production cuts → is higher→ tariffs are increased→ prices are higher again→ supply increases (demand declines) → prices fall→ tariffs are lower→ prices are lower again. Therefore, at the root of the problem, the current cycle of high prices is unsustainable, and one day, as supply increases or demand declines significantly, palm oil prices will weaken in tandem with tariffs.

In fact, in addition to the problem of increasing production mentioned above, the direct result of high prices is the reduction of demand. Taking the traditional large consumer India as an example, due to the high price of palm oil, the import volume of edamame oil and sunflower oil in India has increased significantly, so that the import volume of palm oil after the reduction of crude palm oil import tariffs in early July has not increased. From August 20, India once again lowered import tariffs on edamame oil and sunflower oil, which will once again squeeze out part of the consumption of palm oil. In the face of high oil prices, superimposed soybean oil and palm oil prices upside down, India even began to import soybean oil from the United States. In addition to food and daily use, palm oil, soybean oil and other oils and fats are used in a large part of the biodiesel. However, due to the current peak in the prices of crude oil, coal and natural gas, the cost performance of palm oil and other oils and fats as raw firewood is becoming lower and lower. Not only India, but also the consumption of biodiesel in indonesia, the main producer, is also less than expected: according to the statement of the vice chairman of the Indonesian Palm Oil Association, the amount of palm oil in Indonesia in biodiesel in 2021 may fall from 7.23 million tons in 2020 to 7.07 million tons. The situation with soybean oil is similar. Recently, Brazil's National Energy Policy Commission (CNPE) recently issued an announcement that after the previous reduction of the biodiesel blending ratio from November to December this year to 10%, CNPE set the biodiesel blending rate in diesel in 2022 at 10%; according to the original plan, the blending ratio of Brazilian biodiesel should be increased from 13% to 14% from March 2022. And the decision also means that Brazil's previous plan to raise the biodiesel blending rate to 15% in 2023 may also be difficult to implement.

From the domestic situation, the import volume of palm oil in October was only 530,000 tons, a year-on-year decrease of 21%. In the five months since June this year, except for September, palm oil imports have decreased. From January to October 2021, the total import volume of palm oil was 5.24 million tons, an increase of 4% year-on-year, compared with the cumulative growth rate of 20% and 10% in the first half of the year, which was significantly lower. Such a sluggish import volume, the corresponding price is still in a serious inverted state: except for May-August, the rest of the time imports are loss-making, which indicates the weakness of domestic demand. And from the inventory point of view, as of November 30, the port palm oil inventory has reached 550,000 tons, an increase of 14% year-on-year. Despite reducing palm oil imports in the second half of the year, inventories still turned positive in August from a negative year-on-year ratio.

In short, in the short term, even if the main Southeast Asian producers enter the output off-season, it is difficult for oil prices, especially palm oil January futures prices, to have a significant upward range, of course, the downside may not be too large, and the decline may be difficult to flow smoothly (unless international crude oil prices fall sharply again); but the futures prices in May and September may have more downside after the current sustained high volatility. (Special writer of agricultural products collection and purchase network, author: Wang Weimin, please indicate the source of reprinting, otherwise you will be held responsible according to law.) ）