The vegetable oil complex is currently experiencing a period of significant adjustment. A weaker US dollar and strong yield estimates from the ProFarmer crop tour, which exceeded the August USDA report figures, are weighing on the market. Historically, the ProFarmer tour's estimates have often been on the low side, and with improved August rainfall in key growing regions, the market anticipates that the USDA may even raise its yield forecasts in the September report.
In a major development, reports suggest that the US Environmental Protection Agency's (EPA) 2025 Small Refinery Exemption (SRE) approvals could exceed 1.8 billion RINs, significantly higher than the agency's prior estimate of around 991 million RINs. This news triggered a sharp drop in US soybean oil futures, which in turn led to notable declines in both domestic soybean oil and rapeseed oil prices. Adding to the bearish sentiment, after rapeseed oil futures rallied to highs last week, spot markets failed to follow. Incomplete statistics show that Australian rapeseed and Dubai rapeseed oil saw some trading activity, but cash basis for all three major oils weakened. The rapeseed oil calendar spread has also retreated from its highs.
On the palm oil front, significant trading was seen for September and October shipments, though some December cargoes were washed out. This does not alter the expectation of a domestic palm oil inventory of around 1 million tonnes in the coming months. Export data for the first 20 days of August continues to show a decline from Malaysia. Meanwhile, Indonesia's dry conditions are more severe than Malaysia's, suggesting that Malaysian inventories will continue to build by the end of August.
In India, roughly 40,000 tonnes of palm oil for nearby shipment were washed out last week, while several hundred thousand tonnes of soybean oil, primarily from South America, were purchased. With Indian palm oil prices remaining at elevated levels and South American soybean oil becoming more competitive following the drop in US soybean oil futures, India's August palm oil imports are projected to be similar to July's figures.
Soil moisture levels in both Malaysia and Indonesia continue to decline, especially in Indonesia. Weather forecasts indicate that drought conditions will persist in Kalimantan until early September. Following the dry spells of July and August, September's weather is critical, particularly as El Nino intensity continues to rise. While the immediate drop in crude oil and US soybean oil could trigger a broader correction, the palm oil market is expected to maintain a weak-near-term, strong-long-term structure.
The market is currently pricing the palm oil May contract against the 2024 price highs and has partially factored in the potential for reduced Indonesian production in 2027. However, this year's drought in Indonesia has not yet reached the severity of 2023. Additionally, Indian buying interest for palm oil remains lackluster. Unlike 2024, when Indonesia's initial B50 biodiesel mandate created a supply shortage expectation, the current blending rate increase offers less incremental demand growth than initially hoped, especially with the transition period running through October. The larger demand boost is expected in 2027. For prices to push higher again, a further escalation of bullish factors in both the crude oil and supply-demand fundamentals is required.
Where the Market Stands Now
Looking at international FOB prices for oils and oilseeds as of August 21st, most vegetable oil prices rebounded weekly. European rapeseed oil and sunflower oil saw significant weekly declines, while palm oil FOB prices posted the largest weekly gain. Soybean oil prices in North and South America saw smaller increases. In the oilseed complex, most prices rose, with German rapeseed, Argentine soybeans, and Canadian canola all increasing by more than $20 per tonne.
The FOB spread between Malaysian and Indonesian refined palm oil widened to $43.50 per tonne from $21 the previous week, well above the historical average of $10.17. The spread between Argentine soybean oil and Indonesian crude palm oil moved to -$50 per tonne, compared to -$14 last week and a historical average of $112. In the canola market, Canadian prices remained strong, with the premium over Ukrainian and Australian rapeseed continuing to widen. At Indian ports, the spread between crude soybean oil and crude palm oil narrowed to $4 per tonne from $50, while the crude sunflower oil premium over crude palm oil fell to $190 from $260. The refined soybean oil premium over refined palm oil shifted to $10 from -$5.
Supply, Demand, and Weather Factors
In terms of trading activity, last week saw the purchase of four cargoes each of September and October palm oil shipments, with some December cargoes being washed out. On the demand side, trading volumes for deferred soybean oil increased. Spot basis levels have weakened, with East China's first-grade soybean oil basis softening slightly, and South China's 24-degree palm oil basis dropping to 2701-450. Guangxi's third-grade rapeseed oil basis has rolled over to the 2701 contract, quoted at 2701+400.