What does the collapse in crude oil prices mean for oilseed products?

What does the collapse in crude oil prices mean for oilseed products? Presentation to NIOP Conference, Palm Beach, March 2016 by Dr James Fry, Chairma...
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What does the collapse in crude oil prices mean for oilseed products? Presentation to NIOP Conference, Palm Beach, March 2016 by Dr James Fry, Chairman, LMC International www.LMC-NY.com

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©LMC International, 2016

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Outline of the topics I will be covering today 1. The forces driving soybean plantings and the link with corn. 2. The way that biodiesel has created a central role for palm oil in the vegetable oils market and also created a link between oils and meal prices and crude oil. 3. The impact of El Niño on palm oil and on the supplydemand balance of vegetable oils this year. 4. The outlook for crude oil? What can we say about the impact of shale oil? 5. Conclusions about what this all means for the prospects for oilseed products. 13/03/2016

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Strong demand drives rapid growth in soybean areas, led by S. America

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Soybeans moved above 50% of Argentine crop areas 15 years ago, led by pasture conversion. 50

Million hectares, Argentina

45 40 35 30 25 20 15 10 5 0 1977

1982

1987

1992 Non-soybean

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1997

2002

2007

2012

Soybean

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Brazil also recorded rapid expansion. Of special interest is corn double cropping after beans; this now covers over 50 mn acres in new soy areas. 80

Million hectares, Brazil

70 60 50 40 30 20 10 0 1977 1982 Non-soybean

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1987 1992 Soybean

1997 2002 2007 2012 Non-soybean minus double cropping

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The new frontiers for soybeans help to underpin world soybean prices Soybean areas have been expanding on average by five million acres a year (more than any other crop). Nearly all the expansion has occurred in South America, and mainly far in the interior in Mato Grosso (Brazil), as well as in Paraguay and Bolivia. With no rail routes to the coast, the newest areas face up to $3-$4/bu. in road haulage costs to reach a port. This, combined with a continual need to develop even more remote areas, creates a floor to the bean price.

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In the short run, soybeans must compete for land with other crops, notably corn

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36

52%

35

50%

34

48% 46%

33

44% 32 42% 31 40% 30

38%

29

36%

28

34%

27

32% 1999

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2001 2003 2005 2007 Corn Area Offset One Year

2009

Corn: Soybean Price Ratio, %

Area (million hectares)

US corn plantings reveal farmers’ response to the corn-soybean price ratio in the previous year.

2011 2013 2015 Price Ratio Corn/Soybean

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36

52%

35

50%

34

48% 46%

33

44% 32 42% 31 40% 30

38%

29

36%

28

34%

27

32% 1999

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2001 2003 2005 2007 Corn Area Offset One Year

2009

Corn: soybean ex-farm price ratio, %

Area (million hectares)

At January’s farm-gate prices, the harvested area of corn would be up 2-3 million acres this year, and the soybean area would be down 1-2 million.

2011 2013 2015 Price Ratio Corn/Soybean

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2.5

30%

2.0

20%

1.5

10%

1.0

0%

0.5

-10% 2000

2002

Soy/corn price ratio

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2004

2006

2008

2010

Soy/cane price ratio

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2012

% increase in soy acreage

Price ratio (index where 2000 = 1.00)

Brazil plantings vs. the local soy/corn/cane price ratios demonstrate similar feedback from prices.

2014

% increase in soy acreage

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Biodiesel has changed the balance between world oil and meal demand

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350

175

300

150

250

125

200

100

150

75

100

50

50

25

0

0 1974

1978

1982

1986

1990

1994

1998

2002

Meals, Soymeal Equivalent

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2006

2010

Oil (million metric tons)

Meal (mn metric tons soymeal equivalent )

Biofuel demand for oils made the world’s need for oils grow faster than its need for meal after 2000.

2014

Oils

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This imbalance in the growth in demand favors oil palm. Its oil yield is 8 times that of beans, but its low meal yield leaves the field open for soy. . Tonnes/hectare of product, world average

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Oil yield Soybean 13/03/2016

Meal yield Sunflower

Rapeseed

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Oil palm 13

In view of palm oil’s key role, we need to understand how crude oil affects its price.

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This is an EU price band for vegetable oils. Brent is the floor and palm oil pulls other oils along. It falls to Brent’s price when palm stocks are high. 1,600

EU prices, US$ per tonne

1,400 1,200 1,000 800 600 400 200 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Brent Crude 13/03/2016

Soy oil

Canola oil

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Palm oil 15

Here you see the four occasions since 2008 when palm oil touched Brent prices. (When this occurs, palm oil is cheaper than crude oil in S.E. Asia.) 1,600

EU prices, US$ per tonne

1,400 1,200 1,000 800 600 400 200 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Brent Crude 13/03/2016

Soy oil

Canola oil

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Palm oil 16

US prices follow a similar course, with cottonseed oil the odd one out. Soy oil prices fell very close to WTI twice, and canola and corn followed its lead. 2,000 1,800

US$ per tonne

1,600 1,400 1,200 1,000 800 600 400 200 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Soy Oil

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Cottonseed Oil

Corn Oil

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WTI

Canola Oil 17

Soy oil follows WTI more closely than meal/beans. Their biofuel link is only indirect, as it arises via the competition for land from corn, with its ethanol use. 1,400

Decatur prices, US$ per tonne

1,200 1,000 800 600 400 200 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 WTI Crude Soymeal Soybeans Soy Oil

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Biofuel is now the “tail wagging the dog” of the vegetable oil sector Biofuels now account for 16%-17% of global demand for vegetable oils and corn, and over 20% for sugar. Unlike food demand, biofuel use can swing a great deal from month to month, for example because a mandate allows flexibility in the timing of purchases. In both the EU and US, mandates apply over the year as a whole. Users buy less when bean oil-gasoil (BOGO) spreads are high, but make up for it when they are low. This flexibility is great enough to keep vegetable oils within a price band above the petroleum price. 13/03/2016

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Why didn’t vegetable oil prices follow the crude oil price all the way down?

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Answer: El Niño as measured by the Oceanic Niño Index (ONI)

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The ONI tracks ocean warming. The 2015-16 El Niño is as strong as in 1997-98, the last major El Niño, and is much stronger than that in 2009-10. 2.5 2.0 1.5

ONI

1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Jan

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Mar

May

Jul Sep Nov Jan Mar 1997-98 2009-10 ©LMC International, 2016

May Jul 2015-16

Sep

Nov

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These photos illustrate the impact of the El Niño drought in Eastern Indonesia, as the palms do a strip-tease, eventually dropping their low fronds. “Hawaiian skirt effect” August 2015

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“Sarong Effect” in late 2015

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This shows how El Niño hits SE Asia palm yields in 1996-99 and 2014-17. This year’s drought loss is 5 million tonnes (3% of total world oils output).

S.E. Asian CPO yield, tonnes/hectare

3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2 3.1 3.0 1997 Year before

2015 El Nino

Year after

Next year

Prepared in conjunction with Ganling, 2016 13/03/2016

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The implications for oils prices in 2016-2017 Two factors are supporting vegetable oil prices now. One is El Niño. From palm alone it has cut 3% from the output of all oils that would have been expected in 2016; losses from other crops are in addition to this. The other factor is the new Indonesian biodiesel mandate, which for the first time is properly funded. Oils prices will be supported till at least Q4. However, a 2017 palm oil yield rebound should pull prices down. Meal is outside the biofuel sector, and when oils prices fall back next year, the soy oil share should do likewise 13/03/2016

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What can we say about crude oil?

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140

1,400

120

1,200

100

1,000

80

800

60

600

40

400

20

200

Number of rigs

WTI, $ per barrel

Shale oil supply is the big new factor in the world petroleum market. The number of US rigs drilling for shale oil follows WTI crude prices closely.

0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 WTI Rig count

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6

600

5

500

4

400

3

300

2

200

1

100

Barrels/day per rig

Million barrels per day

However, the productivity of these rigs has grown tenfold since 2007. Therefore, total US shale oil output has only recently started to fall.

0 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Total shale oil output Production per rig

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Shale oil has driven US crude output growth, and now accounts for most US supplies. 10

US oil output, million barrels per day

9 8 7 6 5 4 3 2 1 0 2009

2010

2011 Other

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2013

2014

2015

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World crude oil output in 2016 will remain ahead of demand, adding to 2014 and 2015 surpluses.

World supply and demand, million bbl/day

97 96 95 94 93 92 91 90 89 88 2010

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2011

2012 Output

2013

2014

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2015 Demand

2016

2017

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The shale oil revolution is helping to keep world crude oil stocks at record high levels Global stocks of crude oil will rise until late 2017. The world now knows that shale oil technology has advanced rapidly and that, contrary to the expectations of OPEC producers, shale oil companies have not been forced out of the market by the sharp fall in the crude price. This means that it would be foolish to expect any sudden recovery in the Brent or WTI crude prices during 2016. More important in the long run is the evidence that shale oil will be a dampening influence upon the behavior of the crude price. It will stop it from hitting the heights of $100plus, but will also help to defend the floor to the price.

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Conclusions Vegetable oil prices trade in a price band above crude oil, with palm oil often at the floor. Recently palm has traded well above crude oil as a result of crop losses caused by El Niño. Soybean and other oilseeds are adding 5 million acres a year to soybeans and 5 million to other oilseeds. Many new areas are remote, needing prices that cover heavy transport costs. In the short run, soybean and corn areas switch as prices vary. The latest prices imply that soy plantings will fall a little. Next year when palm output revives, its price will fall towards the price band floor, i.e., the crude price. Higher productivity of shale oil rigs and growing petroleum output point to rising crude stocks till end-2017. This does not favor a higher WTI. 13/03/2016

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Thank you 4th

Oxford Floor, Clarendon House 52 Cornmarket Street Oxford OX1 3HJ UK

T +44 1865 791737 F +44 1865 791739 [email protected]

New York 1841 Broadway New York, NY 10023 USA

T +1 (212) 586-2427 F +1 (212) 397-4756 [email protected]

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[email protected]

[email protected]

Tel: +65 6818 9231

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This presentation and its contents are to be held confidential by the client, and are not to be disclosed, in whole or in part, in any manner, to a third party without the prior written consent of LMC International.

While LMC has endeavored to ensure the accuracy of the data, estimates and forecasts contained in this presentation, any decisions based on them (including those involving investment and planning) are at the client’s own risk. LMC International can accept no liability regarding information analysis and forecasts contained in this presentation.

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