All that work for nothing?
That is, the biofuels lobby worked hard to succeed in kicking off a Washington review of Argentine and Indonesian biodiesel exports, over claims of prices being unduly depressed by government support.
And the probe indeed proposed, last month, hefty tariffs on imports of Argentine and Indonesian biodiesel – boding well for the US industry itself, and indeed demand for soyoil.
(Biodiesel is made from vegetable oils, mainly soyoil in the US and Argentina, and palm oil in Indonesia.)
However, the US Environmental Protection Agency (EPA) has now rained on the parade of domestic biodiesel groups, by proposing a reduction in the mandate for use of advanced biofuels (which include biodiesel) in 2018 and 2019 – in part thanks to the import tariff threat.
“The cost of advanced biofuels is high on a per-gallon basis compared to the petroleum fuels they replace,” the agency said, seeing that as down largely to the expiry at the end of last year of a tax credit for blenders.
However, it added that “we also expect the price of biodiesel used in the US could increase further following a recent preliminary determination by the Department of Commerce that it would be appropriate to place countervailing duties of 41-68% on imports of biodiesel from Argentina and Indonesia.”
The EPA said that it “remains concerned about the high cost of advanced biofuels,” and that “in light of” the import tariffs, saw it as “appropriate to request further comment” on 2018 and 2019 mandate levels.
“Imports may also have an impact on the energy independence and security status of the US,” the EPA added.
The statement, naturally, impressed little the National Biodiesel Board industry group, which said that existing biodiesel capacity of more than 4bn gallons was enough to meet US blending requirements, of some 2bn gallons.
But what of the impact on investors?
Chicago soyoil futures for December, after dropping 1.6% in the last session, (the EPA announcement was made on Tuesday at lunchtime in Washington), actually recovered a bit of ground this time, adding 0.4% to 33.58 cents a pound as of 09:40 UK time (03:40 Chicago time).
Earlier, the contract climbed back above its 200-day moving average, at 33.69 cents a pound.
That looked in part down to a resilient performance by rival palm oil, for which futures for December added 0.2% to 2,755 ringgit a tonne, on top of 2.2% gains in the last session, finding support in ideas of disappointing Malaysian production of the vegetable oil this month.
Production data from the Southern Palm Oil Millers Association reportedly showed a 0.8% decline, month on month, in output for September up to Monday.
September is a particularly important month for Malaysian palm oil production, typically marking the seasonal high.
Just hedge it
Furthermore, it is not as if soyoil futures have exactly rocketed away since the import tariff threat was unveiled – standing below levels ahead of the announcement even ahead of Tuesday’s EPA statement.
This despite continued strength in prices of oil and gasoline.
Indeed, whatever the EPA’s concerns, any biodiesel group wishing to keep its raw material costs low need only engage in a bit of forward purchasing in Chicago, where futures are hardly suggesting a runaway soyoil price.
The highest price for any Chicago contact on Wednesday was 34.45 cents a pound, for July 2018 delivery, with prices below that right out to the most distant lot of December 2020, priced at 34.12 cents a pound.
(That, by the way, covers with a year over the 2018 and 2019 timeframe the EPA is looking at.)
Maybe investors, in failing to depress soyoil futures further, believe the EPA will find there is no case for a reduced mandate after all.
‘Useful amounts of rain’
Soyoil’s recovery helped support values in soybeans themselves, which for November traded in and out of positive territory, showing limited losses of 0.1%, to $9.62 ¼ a bushel, at the time of writing.
The 200-day moving average just below, at $9.60 ½ a bushel, looks an area to watch if price continue to ease.
And there are some negative factors around, with Tobin Gorey at Commonwealth Bank of Australia flagging the “wetter weather outlook in Brazil’s drier soybean regions.
“Weather forecasters have not added more rain but their outlooks are stabilising on useful amounts of rain over the next week,” boding well for sowings which have been held up somewhat by dryness.
CHS Hedging said: “Brazil is expecting much-needed, widespread rainfall during the remainder of the week which is easing concerns over dry conditions that have threatened upcoming soybean plantings.”
Furthermore, there is pressure on values from the US harvest bringing a spike in supplies.
“Warm and dry weather have combines rolling at a good pace in the eastern Corn Belt, and early yield reports tell of better-than-expected yields,” CHS Hedging said.
And there are, on Friday, quarterly grain stocks report as of September 1 due from the US Department of Agriculture, expected by a Reuters poll to come in at 338m bushels, a little below a current USDA estimate of 345m bushel, but a 10-year high nonetheless.
‘Export demand is quiet’
For corn, the stocks data are expected at 2.353bn bushels, 3m bushels above the current USDA estimate, and also a multi-year high.
And harvest is weighing on values too, with Benson Quinn Commodities reporting “active harvest in the central Midwest with yield reports improving”,
Furthermore, “export demand is quiet with market focused on seasonal soybean exports”, which are themselves being sapped (in order terms) by the week-long holiday in China.
Chicago corn futures for December dipped 0.4% to $3/50 ¾ a bushel.
Sydney rally reverses
They were little helped by a retreat too in wheat futures, which dropped 0.9% to $4.49 ¾ a bushel in Chicago for December, undermined by weakness in the rouble, the currency of the world’s top exporting country, Russia, back above 58 to $1.
A weaker rouble improves the competitiveness of Russia’s wheat exports.
Furthermore, futures dropped sharply in Australia too, by 2.7% to Aus$288.00 a tonne for January for east coast wheat, amid reports of much-needed rains on their way for some parts of eastern Australia.
Strong Russian harvest in 2018?
Meanwhile, SovEcon flagged the potential for a large Russian crop next year too, flagging a catch-up in sowings of winter crops to 10.3m hectares, “which is close to the previous year’s level.
“In the previous week, the lag in the pace of planting compared to the previous year was 1m hectares.”
The strong pace of sowing leaves open the prospect that plantings may match, “or even exceed”, the record 18.1m hectares seeded for the 2017 harvest, which is seen of course setting a record by a distance in production terms.
So Russia could have a “bumper” harvest next year too – depending on how severe this winter, and frost damage to crops, turns out, SovEcon said.