Most canola contracts lost a little more than 3/4 percent (November contract -C$3.50 per tonne) on Tuesday on the weakness in soybean oil futures and an increase in the pace of farmer selling

It was the second consecutive day of lower prices, which left the most-actively traded November contract back below the psychologically critical C$450-per-tonne level. Selling at the upper Bollinger band and the 50-day moving average also contributed to the weakness. The decline also drove prices back into the trading range futures have been in since late June. While soybean oil and canola oil prices could continue to correct in the very short term, rising world vegetable oil prices should provide support for both markets in the longer term.

Rapeseed futures on the Matif exchange rose about 1/2 percent (November contract +€2.00 per tonne) as prices continue to consolidate the gains driven by record hot and dry weather conditions across parts of Europe in July. Buying at the 10-day and 20-day moving averages helped to support the gains on Tuesday, but futures are trading in a range between €371 and €380 per tonne as traders and analysts wait for a better understanding of the impact of the growing conditions on yields.

PROFIT-TAKING DRIVES SOYBEAN OIL FUTURES LOWER; EXPECT MORE VOLATILITY AS WORLD VEGETABLE OIL PRICES CONTINUE TO RALLY

Soybean futures shot higher early in the U.S. session following a tweet by President Trump that indicated a delay in the some of the next round of tariffs on goods from China. A trend toward slightly drier weather across the Midwest also helped support prices and left most 2019/20 delivery contracts up about one percent (November contract + 9 3/4 cents per bushel). Futures traded as much as 15 cents higher immediately following the announcement of the delay, but technically-driven selling at the 20-day moving average and the upper bound of the recent trading channel limited gains. Funds were reported buyers of 7,500 soybean contracts, 5,000 soybean meal contracts, and were reported sellers of 4,500 soybean oil contracts.

Profit-taking following the massive run-up in prices triggered fund selling to drive soybean oil futures sharply lower on Tuesday with most contracts down almost 1 3/4 percent (December contract -51 basis points per pound). Selling at the 62 percent Fibonacci retracement level and the upper Bollinger band weighed on prices, but buying at the 50 percent retracement level and just above the 200-day moving average limited the decline. Soybean oil futures are likely to remain volatile as rising world vegetable oil prices and the United States Department of Agriculture’s (USDA’s) bullish balance sheets suggest prices could move substantially higher but slowing growth in demand from the biofuel industry could potentially reshape USDA’s forecasts.

To date, the long-anticipated slowdown in biomass-based diesel output has barely shown up in the data, but uncertainty surrounding the reinstatement of the Biodiesel Blenders’ Tax Credit (BTC) and the issuance of 31 waivers under the Small Refinery Exemption (SRE) program have unquestionably degraded the economics of production. If Congress does not restore the BTC this fall, soybean oil usage in biodiesel production will likely fall well short of USDA’s forecasts. However, the likely decline in soybean oil basis levels that would accompany the slowdown could make exports from the United States more attractive at a time when Chinese buyers may be buying substantial quantities of vegetable oil from exporting countries. Even if Chinese buyers do not purchase soybean oil from the United States, the dislocation in trade flows resulting from large Chinese purchases could provide opportunities for U.S. exporters.

Palm oil futures continued to rally following a long holiday weekend with most contracts gaining about 1 1/2 percent (October contract +33 ringgit per tonne). The continuing rally in vegetable oil values on the Dalian exchange, a surprise decline in palm oil inventories in month-ending inventories in Malaysia, and bullish cargo surveyor data for the first 10 days of August drove prices to the highest level since April 24 and above the psychologically important 2,200-ringgit level. Analysts had expected the Malaysian Palm Oil Board (MPOB) to report an increase of about three percent in inventories at the end of July, but the MPOB reported a surprisingly large increase in exports, a marketing-year low in imports and strong domestic usage, which combined to reduce inventories to the lowest level since last July.

Palm oil futures have rallied almost 14 percent from the low set on July 10, and the sharp increase in prices has reduced the spread between soybean oil and palm oil futures to about 5 1/2 cents per pound, which is down more than two cents from the level at the end of June. Chinese buyers are more likely to buy palm oil than either rapeseed oil or soybean oil, given the current tensions between the Chinese government and the governments of the United States and Canada, which is part of the reason palm oil has rallied so much relative to soybean oil. The six-month moving average of monthly Chinese palm oil imports from Indonesia and Malaysia has risen to 500,000 tonnes as of May 2019 from less than 350,000 tonnes per month in May 2018 and less than 300,000 tonnes in May 2017. If Chinese buyers continue to accelerate purchases, the resulting decline in the spread between palm oil and soybean oil will drive some end-users to switch to soybean oil, which combined with the potential trade flow dislocations could provide a significant opportunity for U.S. soybean oil exports to rise substantially above USDA’s expectations.

Vegetable oil prices continued to rally on the Dalian exchange, but the pace of the increase slowed for soybean oil futures, which settled less than 1/4 percent higher (September contract +10 yuan per tonne). Palm oil futures rose almost one percent (September contract +42 yuan per tonne) on the surprisingly bullish MPOB data. The rally in palm oil futures left the contract at its highest level since April 15, but selling at the psychologically important 4,700-yuan level limited the gains. Soybean oil futures continued to set life-of-contract highs, but selling at the psychological level of 6,100-yuan level limited the advance on Tuesday. It is difficult to know precisely what the vegetable oil fundamentals are in China due to the lack of information regarding the monthly crushing activity so it is tough to say with any certainty how much vegetable oil Chinese buyers may need in the coming months. However, the sharp run-up in vegetable oil futures on the Dalian exchange following a long period of consolidation could indicate that the shortage is in the early stages and world vegetable oil prices could remain well supported through the end of the year.