Nov 6 / Ignacio Espinola

Palm Oil Market Update

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*     US 45Z could change it all.

*     Palm Oil prices going up while Soybean Oil prices touched 2Y low levels.

*     Thailand bans Palm Oil exports until January 2025.

*     Malaysian export raising 13.5% M-o-M.

Current Scenario

Over the last weeks, soybean oil prices have touched the 2 years lowest level while palm oil prices have rallied. There are some factors that can explain this movements.

While there are some important changes in the US tax policy that could change the dynamics of the markets while there is other news regarding palm oil that could also explain the movements in the futures.

Soybean oil, palm oil, ethanol, used cooking oil and tallow prices are all interconnected. We will try to bring some clarity to what is going on with the market in this article.

A law that could change the dynamics:

Recently, with the US 45Z Tax Credit is set to roll out in January 2025, agricultural and biofuel industries are having trouble anticipating what is going to happen. Many players are complaining about the unclear game rules due to a new amendment proposed which could bring some modifications into the 45Z clean fuels tax that should change the business dynamics.

The 45Z Clean Fuels Tax Credit was introduced in the 2022 Inflation Reduction Act and it is a financial tool that works as an incentive for producing and selling low/emission transformation fuels. This credit begins at 20 cents per gallon for non-aviation fuels and 35 cents per gallon for sustainable aviation fuel (SAF). This rule applies from January 2025 through 2027. Recently, a change was proposed in September in the “Farmer First Fuel Incentive” Act that could turn around the dynamics of the market. The changes proposed are:

*    Restrict eligibility for the 45Z Clean Fuel Production tax benefits to only renewable fuels that use domestic (US) feedstock

*    Extend the 45Z tax credit to a full 10-year credit (until 2034) 

Also, the expanding “Clean Fuel Production Act” proposed in October requires the following important changes:

*    Extend the 45Z tax credit to 2037 

Why could this change the dynamics?

Over the last 2 years, the US has increased it’s imports of Used Cooking Oil (UCO) from China and tallow from Brazil in order to use this as feedstocks for biofuels production. This imports, who are done at a cheaper price versus the local alternative, have generated a negative effect for the US farmer and that is the main reason of this changes proposed in the above-mentioned act.

If this addendum goes through, the local soybean oil (soybean oil is used for biofuel production) production could increase its demand in the local market lifting the CBOT prices (SBO futures recently got a hit and came back to the lowest levels in 2 years).

Furthermore, there will be a global surplus in UCO and tallow. Finally, if the treats of a potential trade war between US-China occurs, probably the Chinese UCO production will have to find home somewhere else.

Finally, foreign-produced biofuels will be less competitive in the US market and that should reduce their imports, specially from Europe who exported 1 M ton of biodiesel to US last year. With this potential lack of exports, European prices should tend to decrease adding pressure to the global market.
Palm Oil vs Soybean Oil Prices Usd/Mt

Source: Reuters, Hedgepoint

Palm Oil market developments

Starting with Thailand:

Thailand’s government has decided to ban the export of raw palm oil until the end of the current year. This decision has been taken due to a low production caused by drought and plant diseases which has created an increase in the local palm oil prices up, forcing the government to ban the exports to protect the palm local market and it´s consumers. There are rumors that the government could even reduce the percentage of palm oil used for ethanol to control the situation.

Local vendors, who used to buy palm oil in 1-liter bags by dozen at 520 baht are now buying it at 690 baht, an increase of 33%. Also, they have reported not to drive this extra cost to the final consumer because it would make their products too expensive and therefore, their demand would fall.

The government is trying to control the situation until January 2025, where the production should go back to normal values.

How are Malaysia’s exports performing?

Malaysian palm oil exports in October ended up +13.7% higher than the previous month, with 200k tons exported. As a remark, crude palm oil numbers where 460 t ton versus previous month at 287 t ton.

In addition, the country stocks are decreasing due to the good export levels creating support for the Palm futures. Moreover, the expectation of a lower production combined with the optimism for an increase in exports to China has created some support in the market, driven mostly by funds buying futures above the 4,600-ringgit level (which also works as a psychological level).

Putting everything together:

The US 45Z Tax Credit could bring a big change in the world oil dynamics. If the amendments proposed get materialized, we could see an increase in the local SBO consumption together with a decrease in the UCO imports from China and tallow imports from Brazil. This should put pressure on the soybean oil prices in CBOT. So far, it seems than the soybean oil prices have not reacted yet into this new, but it could be a trigger for a potential future rally and a change in the global cash and futures dynamics.

Last news regarding palm oil in Thailand and Malaysia have brought some support for the palm futures which could explain the last rally in the futures.

When we compare both futures, SBO and Palm Oil, we can see that the spread between both have increased over the last weeks.

Moreover, when we see the last COT report we can see that the funds have turned around their SBO position, going long for the second time in a year with a 10k lots position (previous time was 2 weeks ago, with 2k long).

To conclude, we have to follow closely the palm oil activity to understand if prices are going to continue this trend of if they will have a pull back. At the same time, and due to their correlation with SBO, it is also important to follow what is going to happen in the US with the US 45Z Tax Credit and also the US elections, which will probably bring some clarity on the U.S. ethanol policy.

Funds SBO Spec Position in lots - Chicago - CBOT

Source: USDA - Hedgepoint

Written by Ignacio Espinola
ignacio.espinola@hedgepointglobal.com
Reviewed by Thais Italiani
Thais.Italiani@hedgepointglobal.com
www.hedgepointglobal.com

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