Oilseed glut should reignite global demand

Analysis: There are abundant world stocks of major oilseeds, 
but demand is expected to continue to increase

U.S. soybean supply, in millions of bushels. Source: USDA Agricultural Projections to 2019, February 2010, USDA Economic Research Service.

Production of the world’s top oilseeds will exceed demand by the largest margin ever in 2014-15, helping to push year-end stocks above 100 million tonnes for the first time.

The glut of major oilseeds has already driven prices to multi-year lows. It is widely expected to pressure prices for most of 2015.

This steep increase in supplies has been well chronicled. Yet traders have paid less attention to the demand side of the oilseed equation, and could be in for a surprise in 2015 if consumption picks up faster than expected.

The U.S. Department of Agriculture has pencilled in a rise of roughly 3.8 per cent in demand for the top oilseeds in 2014-15, slower than the expected 6.3 per cent climb in production. But oilseed demand grew by 5.7 per cent last year, and averaged more than five per cent annually between 2009 and 2012, so there is risk that usage could steal the limelight from supply in 2015.

Supply surge

Global production of the most widely traded oilseeds has climbed by nearly 50 per cent over the past decade. It grew at an average annual rate of nearly 5.5 per cent from 2008 to 2014, despite back-to-back production problems in 2010-11 and 2011-12. Over the same period, world exports increased at an average annual rate of 6.8 per cent.

Oilseed stocks increased by an annual average rate of 5.8 per cent during the 2008-14 era, with several double-digit swings in both directions. Robust demand depleted inventories following poor growing seasons, while bumper crops speedily replenished them after good growing seasons.

Recently oilseed stocks have climbed by their fastest clip ever, swelling by more than 22 per cent last year. They are projected to climb a further 31 per cent in 2014-15 as mammoth U.S. and South American soybean are gathered. The projected 2014-15 total is just over 100 million tonnes, nearly 40 million tonnes larger than the 2011-12 total. The projection represents more than 88 days of use.

Slow and steady demand momentum

As abundant as those inventories may appear, the resulting downward pressure on prices is whetting the appetite of end-users, who tend to be slower to respond to production swings than others in the market. Still, there has been only one single instance of year-over-year demand contraction in 25 years.

What’s more, demand rates have tended to pick up faster than average in the immediate wake of production surges, as supply-led price pressure helps to improve end-user margins.

Total oilseed demand grew 5.7 per cent last year, its fastest since 2009-10. For 2014-15, USDA expects consumption to grow at around 3.8 per cent, which would be below the five-year average of 4.4 per cent and close to two points below last year’s rate.

Oilseeds are trading at or near their lowest levels in four years and around 20 to 30 per cent below most of 2013. It stands to reason that demand has the potential to grow at least as quickly as last year, if not faster.

And if the 2014-15 growth rate emerges at five per cent rather than 3.8 per cent, that would equate to an additional five million tonnes of oilseed usage. A growth rate of seven per cent would mean close to 13 million tonnes of additional oilseed consumption.

With projected inventories seen at around 100 million tonnes, an extra five million tonnes of use may not seem significant. But any reversal in stocks momentum could boost market sentiment, which in turn could prompt more aggressive buying interest by consumers. This scenario could lift prices over the course of the year.

So while current focus remains on the historic scale of global supplies, demand growth could well emerge as the main driver of market action in 2015 as consumers react en masse to the prevailing low prices.

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