In a late August 2022 article on Barchart, I wrote, “Inflation, trade issues, geopolitical tensions, and weather events have caused edible oil prices to soar over the past years. The rise in biofuel demand has also put upward pressure on the oil prices. Palm oil is the world’s leading edible oil, and all signs point to a continuation of price volatility in the multi-purpose agricultural commodity.” In that piece, I highlighted palm oil’s supply and demand fundamentals that show Indonesia is the leading producer, exporter, and consumer, with India and China among the top consumers. Malaysia is the second-leading palm oil producer.
Crude palm oil futures trade on the Chicago Mercantile Exchange (CME). Each contract calls for 25 metric tons of Malaysian crude palm oil. In the late August article, the nearby price of palm oil for September 2022 delivery was at the $946.25 per ton level. On January 13, palm oil for February 2023 delivery was lower at $888.25 per ton.
An all-time high in 2022 and a correction
Crude palm oil futures rose to a record high in 2022.
The chart highlights palm oil futures rise to $1,611.75 per metric ton in March 2022, the month petroleum and many other commodities rose to record or multi-year peaks after Russia invaded Ukraine.
Since the introduction of the Chicago Mercantile Exchange’s (CME) palm oil futures in September 2016, the 2020 high was $766 per metric ton. The futures more than doubled from that level in March 2022 and have since retreated to the $888.25 level on January 16. Palm oil futures remain above the 2020 high in mid-January.
Malaysian palm oil stocks decline
The Malaysian Palm Oil Board’s director-general, Ahmed Parveez Ghulam Kadir, recently said palm Malaysian palm oil inventories are likely to decline 8.6% to two million metric tons in 2023. Stocks fell 4.09% to 2.19 million tons in December 2022 from the level in November after falling 4.98% in November. Crude palm oil production declined 3.68% on a month-on-month basis to 1.62 million tons. While exports rose in November, they fell in December.
Meanwhile, Malaysia is considering stopping exports to the European Union after the EU passed legislation to protect forests by strictly regulating palm oil sales. The bottom line is declining stockpiles support palm oil prices.
Indonesian biofuel demand must go beyond palm oil
Indonesia, the world’s leading palm oil producer and consumer, expects local consumption to rise to 24.3 million metric tons in 2023. Indonesia plans to increase its biodiesel mandate to 35%, increasing Indonesian palm oil demand and prices. With crude oil prices at the highest level in years, Indonesia is looking beyond palm oil dependence to other oilseeds in the vegetable oil complex. Canola and soybean oil are other inputs in biofuels.
Meanwhile, increasing Indonesia’s mandate could direct palm oil away from the export market, causing a tightening supply-demand fundamentals, and pushing prices higher. The Indonesian government is considering using other feedstocks as the demand for biofuel rises.
Canola and soybean oil remain at multi-year highs
Canola and soybean oil, like palm oil, are essential ingredients in many foods and products consumed daily. While palm oil reached a record high in 2022, canola and soybean oil also traded to all-time peaks.
The chart dating back to the mid-1970s shows canola prices reached $1,220.90 per ton in April 2022. At the $840.20 level on January 16, canola corrected but was at the highest level in nearly half a century, since 1975.
Soybean oil futures reached 91.40 cents per pound in April 2022, surpassing the March 2008 71.26 cents previous record peak. At the 63 cents level on January 16, soybean oil was at its highest price in fifteen years since 2008.
Agriculture is the new energy- Changing fundamentals
Agricultural commodities have fed the world in the past, but they are increasingly fueling our planet in 2023. Climate change initiatives and high traditional energy prices have stressed the fundamental balance sheets for palm, rapeseed, and soybeans. As the trend towards a greener energy path continues to gain steam, the demand for palm oil, canola, and soybean oil will rise, and supplies will struggle to keep pace with the increasing global requirements. Meanwhile, population growth continues to increase the demand side of the equation for all raw materials. With nearly eight billion people to feed and fuel, demand is an ever-increasing factor.
The trend away from traditional fossil fuels puts upward pressure on the prices of agricultural alternatives, a trend that will likely continue to support palm oil and other biofuel ingredients in 2023 and beyond.
More Grain News from Barchart
- Sunday Scaries: What I'm Watching This Week in the Grain Markets
- Mixed Friday for Wheat Market
- Friday Soy Markets Close Mixed
- Friday Corn Extends Rally
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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