Rocks on Stocks – Vegetable oils in crisis too

Event
Vegetable oil supply could be entering a crisis. It is being affected by some of the same issues that are causing the spike in coal prices.

Impact
China is finally acknowledging that rapeseed crops have been significantly affected by the snowstorms. The latest reports are that it has lost 1.8m tonnes of rapeseed, representing 4.6% of its vegetable oil production (1.8m tonnes of seed yields about 680,000 tonnes of oil).

To cope with this loss, China will have to dig into its vegetable oil reserves. According to the US Dept of Agriculture, these inventories currently stand at around 740,000 tonnes and are completely held in soy. Removing 680,000 tonnes from this would leave 60,000, equivalent to only one day of use.

Actual crop losses could be higher than this, and the quality of Chinese inventory is not clear, so the true situation could be a lot worse.

China will clearly have to buy a lot more vegetable oil this year. The question is, from where? In our recent major report on the outlook for agricultural commodities for 2008, More Fun on the Farm (12 February 2008), we highlighted the following points:

- Vegetable oil inventories are chronically tight, with stock/use ratios never having been lower than they are now. When inventories are this tight there is no buffer, and prices become highly
susceptible to any further supply disruptions.
- There is the chance of further major disruptions to palm crops in Asia due to the La Nina effect
now underway. Flooding could cause crop damage in Southeast Asia, and there is a good chance
that droughts could affect soy production in the Americas over the summer (which is another
typical consequence of La Nina).
- This raises the potential for a huge squeeze in vegetable oils and a surge in palm oil prices and
other prices in coming months. The imbalances here are as acute as for any other commodity.

We strongly recommend the plantation companies: KLK (KLK MK, RM18.60, OP, TP:RM22.70),
Astra Agro (AALI IJ, Rp34,000, OP, TP:Rp39,500), Bakrie (UNSP IJ, Rp2,600, OP, TP:Rp3,150), London Sumatra (LSIP IJ, Rp12,900, OP, TP:Rp16,500). Note that palm oil prices are already up 14% this month, probably on the back of this news.