Crude Degummed Soybean Oil (CDSO) is produced from fair to average quality crude soybeans.
Market Summary
The price of crude degummed soybean oil has been rebounding since April with a decrease in export stocks in leading exporting countries. The current soybean prices are under considerable pressure as the US and Brazil are seeing increased crop volume, which will make a favorable situation for crushers. Even bigger South American soybean crops and accumulated stocks in China could suppress a sustained price rally. In the long term, the demand from China will decrease continuously in line with the development of the Chinese local crush industry. On the other hand, the Indian consumption is surpassing China, with increases in import tax on refined soybean oil, which is expected to boost the demand on CDSO.
Production of CDSO
Most of the free fatty acids and gums naturally present in soybeans are removed by hydration and physical separation, or “degumming” which is completed at refineries prior to export. After that, it requires further processing, such as refinement, bleaching, deodorizing, and filtration, before it is considered an edible oil to be used in food products.
When marketing soybeans, the value chain may choose to process soybeans into meal and oil or export whole soybeans. When exporting whole soybeans, no additional value is created, and the value creation remains $465 per acre. (In the case of the US market). If the value chain further processes the oil into biodiesel, then the oil’s value becomes $168 per acre for soybean oil and $243 per acre for biodiesel. Uses such as oil for human consumption, meals for livestock feed, whole beans into food or industrial products can be added to generate more value.
Diagram 1. The Production Process of Soybean Oil
Diagram 2. The Value Chain of Soybean - Soybean Oil
Key External Drivers of the Supply
The Global Supply
Soybean oil is projected to produce 57.62 million metric tons in the 2019/2020 season, a 0.6% drop from the previous year. Compared to productions from 2016/2017, it has seen a 6.8% increase in production, lower than the increase rate of total oils and fats (7.8%) in the same period. Despite this, soybean oil is the second-most-produced vegetable oil after palm oil as the main firms are becoming more vertically integrated and have larger production and storage capacities than the firms that existed decades ago.
The Price of Soybeans
When the price of soybeans rises, so does the price of crude vegetable oil, a key factor in determining the production. The average price of soybean oil per pound over the past 20 years has been 2.35 times the average price of soybean meal, but the difference (spread) is not constant and ranges from 1.4 to 3.1 times. As of W1 July, the spread between soybean meal and soybean oil is within 1.7 times.
Soybean prices are rebounding as China has ramped up its purchases of U.S. soybeans recently, which hinders the profitability of the oil processors. It is expected that the current momentum could push soybean prices to over $10 a bushel, which would be the highest level in over a year. Normally, Brazil is the main seller in the export market during the spring, and it was an especially aggressive seller this year. Brazilian farmers have sold 87.5% of their record 124 million metric ton 2019/20 soybean crop as of June 5 at a record pace. But Brazil’s currency has been appreciated by nearly 5% in June and the U.S. dollar has weakened by more than 3% in the same time frame, making US exports more attractive for China.
Graph 1. The Spread between Soybean Meal and Soybean Oil
Source: Bloomberg
(External factors-Soybean price) Chinese meat consumption
China’s meat consumption has been ever-growing, and it has heavily relied on imports for its animal feed supply, especially due to its high input costs to produce soybeans. The high demand for soybeans is pressuring prices higher, in which prices of byproducts other than soybean meal, including soybean oil, are affected as well. Imports for soybean, as well as pork, have increased recently due to the outbreak of the swine flu, with imports expected to be at 92.48 million tonnes for this year, and eventually to 96.62 million tonnes in 2025.
Key External Drivers of the Demand
(Negative) Food-Grade Oil Demand
Partial hydrogenation, which creates trans fats, was used to improve soybean oil’s versatility in product applications. Between 2005 and fall 2013, at least 73 percent of processed food trans-fat content were voluntarily removed. This change has been estimated to have resulted in the loss of 8 million acres of demand for soybean oil.
The US FDA revoked the generally recognized safe status for partially hydrogenated oil in June 2015, which may further erode demand for soy oil products. At least two opportunities may counter this soybean oil demand change. First, interesterified soybean oil would enable the food industry to continue using soybean oil in challenging applications where partially hydrogenated oil fits particularly well. Processors may weigh this opportunity against other methods of finding suitable solid or semi-solid shortenings. Second, producers may increase identity-preserved high-oleic soybean production to meet end-user demands.
(Positive) Economic Growth in Emerging Markets
When the economy grows, people increase the consumption of vegetable oil. Moreover, when crude oil prices surge, biodiesel prices tend to rise, which also increases ethanol and vegetable oil prices. In fact, these markets sometimes perform well in predicting future returns for the crude oil market itself. If soybean oil prices soar, it has the potential to increase soybean prices. Nevertheless, a rise in soybean prices could affect sowing decisions and potentially increase global soybean production a year later. Thus, a rise in soybean oil prices can lead to an increase in the production of whole soybeans, which in turn can fuel the supply of both the expensive soybean oil and generally cheaper soybean meal.
Price Trends
Graph 2. Producer Price Index: Crude Soybean Oil, Degummed
Source: FRED
After hitting a high point in late 2019, soybean oil (crude oil) prices at have been on a declining trend when it hit its lowest point in the year in April, closing at 26.42 USD at the Chicago Board of Trade (CBOT), and then increasing to 28.88 USD as of July. For the rebounding price in June-July, intensified international demand also had a positive effect on quotes of other vegetable oils. However, in the case of soybean oils, the main reason for the increase in prices was a decrease in export stocks in leading exporting countries. The producer price of CDSO has been stagnant since the end of 2018, maintaining a 40% lower position than that of 2012.
Graph 3. Crude Degummed Soybean Oil - FOB Prices for Brazil (USD/MT)
Source: Bloomberg
While the future price of soybean oil is rebounding, the FOB Sao Paulo price of Crude Degummed Soybean oil has been steadily increasing since the beginning of April following the similar trends of CBOT price.
Graph 4. Production, Exports and Domestic Consumption of Soybean Oil
Consumption Trends and Forecast
Soybean oil is subject to different demands and a more seasonal demand structure than soybean meal in which it is more about biodiesel demand. Demand for soybean oil has risen again as the production of biodiesel fell. US consumption of soybean oil has risen from 656 million pounds in March to 672 million pounds in April. In recent months, biodiesel industries have been facing difficulties in sales, a scenario that limited the consumption of soybean oil. Now, many units have low inventories and are therefore active in the purchase of the derivative. Processor industries, however, have a reduced stock of oil, due to difficulties in acquiring soybeans.
On the Indian side, the GMO policy restricts imports of the Soybeans. Hence India only imports crude Soybean oil from the Crushing Capacities installed primarily in Argentina and partly in Brazil, which is then refined at the various refineries at the Port locations on the western and eastern coast of India. India has recently announced in early June that it is considering hiking up import taxes on its edible oil imports in an effort to boost domestic production of edible oil, with talks of increasing the current 35% tax on soybean, sunflower, and rapeseed oil by 5%. Although palm oil accounts for a large share of India’s vegetable oil imports, India surpassed China in 2013/14 to become the world’s leading importer of soybean oil. With increases in import tax on refined soybean oil, this could lead to a boost for its own refinery industry which in turn increases the demand on CDSO.
Currently, vegetable oil imports in 2020/2021 for palm oil in India will increase due to the relaxation of lockdown restrictions, from 9 million metric tons to 15.45 million metric tons, while soybean oil imports will remain the same with 3.4 million metric tons.
Graph 5. Import Volumes of Soybean Oil in India and China
Source: USDA
China
In May 2020, China purchased US soybean oil for the first time since 2018. China purchased 20,000 tonnes of soybean oil in May this year, down 55.8% from the volume registered a year earlier. From January to May this year, imports of the commodity totaled 200 thousand tons. However, in the first five months of 2020, China increased its import of vegetable oil from Russia by 2.6 times in annual terms - up to 4854.6 tons. The main types of vegetable oil imported were soybean, rapeseed, and mustard.
The global oil industry has been undergoing important changes in recent years with the emergence of China as a key new actor on the soybean oil scene. Many of the most important multinational companies have been relocating their oil plants from the USA to China and Latin America. China’s crushing capacity and the production of soybean oil and meal have been increasing at very high rates over the last 2 decades. In contrast, imports of soybean oil have grown at a strikingly low annual rate of 1.5% and imports of soybean meals have decreased continuously in line with the development of the Chinese crush industry.
Table 1. Changes in the Chinese Soybean Value Chain Variation 2009/1995 (%)
Source: USDA
Production updates: Supply of Soybean
US
The U.S. is expected to account for more than 19 percent of global soybean production in 2019/20 but gradually lose market share as domestic use for biodiesel production expands.
U.S. soybean production for 2020/21 is projected at 4.125 billion bushels, up 568 million from last year’s crop. The increase is largely based on farmers following through on their intentions to plant 83.5 million acres of soybeans for an expected harvested area of 82.8 million acres. Despite expectations for a larger U.S. soybean crop, a revived export market should tighten season-ending stocks for 2020/21 to 405 million bushels. If realized, it would be a steep reduction compared with the revised 2019/20 forecast carryout of 580 million bushels and the 2018/19 inventory of 909 million.
Even so, considerable pressure will remain on the level of soybean prices. Even bigger South American soybean crops and accumulation of stocks in China could suppress a sustained price rally. Currently, forward pricing contracts for soybeans are less attractive than they were a year ago.
Brazil
Brazil’s annual soybean oil exports are projected to increase slightly from 1.1 million to 1.3 million tons over the coming decade, as the country is expected to use more soybean oil for biodiesel production. The expansion of soybean production into new areas of cultivation is expected to gradually increase its soybean oil exports.
Brazil has harvested a record harvest of 125 million tonnes of soybeans this year, but massive exports with strong demand from China and record domestic processing in 2020 are expected to leave the final stocks of the country at the lowest levels in history.
The soybean export from Brazil in 2020 was estimated at 79.5 million tons, compared to 78 million in the previous forecast, while the harvest forecast was increased by 500 thousand tons, which wiped the stock.
The record harvest, together with the initial stocks, guarantees that there will be enough supply to meet the growing demand for soy products in the domestic and foreign markets. In addition to grain exports, soybean meal and oil shipments are also heated, whose export estimates have also been revised upwards, to 16.5 million and 1 million tons, respectively.
Argentina
The volume of soybeans crushed in Argentina in the month of May is above expectations and came in 1.2% higher on the year. Due to Argentina’s extensive processing capacity of oilseed crushing, it allows the country to produce soybean oil with high-efficiency levels. Approximately 20% of soybean grains are exported to be crushed overseas and the rest is crushed in Argentina to produce pellets, oil cakes, and soybean oil.
In recent years, the Argentinean oil industry has gone through a process of change that has improved its efficiency, including a large increase in crushing capacity. The average size of the Argentinean oil industry firms is larger than those in Brazil and the US and it has the biggest crushing plants in the world oil industry. Argentine soybean oil is often preferred to Black Sea sunflower oil by Indian buyers as it is degummed (in Crude Degummed Soybean Oil form) and easier to refine.
Argentina plans to raise taxes on soybean, soybean oil, and soy meal exports to 33% from the current 30%.
Ukraine
Production of soybean oil and meal in Ukraine decreased due to a shortage of raw materials In September-May 2019/20 marketing year (MY), compared to the same period in 2018/19 MY. There is an increase in the production of sunflower oil, but reduced production of soybean products due to shortage of raw materials. Ukrainian producers reduced the production of unrefined soybean oil by 6.7% and soybean meal by 6.5%.
In addition to the soybean deficit, increased competition between processors and exporters has warmed oil prices in the country. Prices have risen by 35% since the start of the season. In the new 2020/21 MY, the soybean planting area will be reduced to 1.65 million hectares compared to 1.77 million hectares, and the yield will decrease to 4 million tons against 4.35 million tons.
Sources
- US Soybean Value Chain, University of Missouri
- “China sees higher 2020 soybean, pork imports amid industry challenges.” Reuters.
- “India plans to hike edible oil import taxes to boost local supply, sources say.” Reuters.
- The Brazilian Association of Vegetable Oil Industries
