Palm oil may, in two ways, be offering grain investors a glimpse of the future.
The first is the sharp decline in prices of the vegetable oil is a reminder that rallies in commodities, vulnerable to supply and demand responses, tend to be more transient than those in many other assets.
While Kuala Lumpur palm oil futures rebounded by 3.6% on Thursday from the previous session’s 19-month closing low, they remain down by more than 50% from the record high of 7,074 ringgit a tonne set in March.
That is a taste of things to come, one day, for grain futures too.
Palm vs grains
That palm oil prices have performed particularly poorly thanks to some idiosyncratic factors, such as Indonesia’s quest for exports to run-down stocks built up by a shipment ban five months ago, besides the seasonal peak in South East Asian output around this time of year.
Vegetable oils are also more exposed than many ags to growing world economic concern – as 2020’s Covid fallout showed – given their use in making biodiesel, besides their sizeable reliance for demand on the foodservice industry.
Grains, by contrast, have found support from the difficulties facing many farmers in boosting output to exploit high values, with dryness hurting crops in the likes of Europe and the US.
Still, at some point grain growers will manage a strong harvest, perhaps when La Nina, now in its third round, is in the rear-view mirror.
And as to how far prices will then fall, well, palm oil could be about to teach a lesson here too.
At least if Dorab Mistry, the respected palm oil analyst, has it right.
According to him, palm oil futures will bottom out at the end of this year at 2,500 ringgit a tonne, the level at which he sees inefficient producers beginning to be priced out of business. (Better-placed producer IOI Corp, for instance, has revealed a production cost of 2,100 ringgit per tonne.)
But even 2,500 ringgit a tonne, while down more than 60% from March’s record high, would be above the level of 2,000 ringgit a tonne or so which has represented something of a floor in the past. As in 2018, 2019 and in 2020’s pandemic selldown too, for instance.
It would appear that the floor has been raised by some 25% by the boost to production costs from swelling prices for the likes of inputs such as fertilizer, as well as labour.
Corn, soybean read-throughs
There is some evidence in the past for grain prices having floors which rise in steps.
Corn, for instance, having historically found support around $2 a bushel, has since price spikes prompted by the 2007-08 grain supply squeeze, and the 2012 US drought, barely trodden below $3 a bushel.
For soybeans, the floor looks more like $8 a bushel, around twice the level that reigned coming into this century.
It may well be that the latest run of cost prices increases has raised the floor again to levels of – on the read-through from palm oil – $10 a bushel for soybeans, and approaching $4 a bushel for corn.
Sellers vs buyers
How accurate such an assessment proves will depend in part on how far prices of main cost items retreat too.
Fertilizers, for instance, have historically found sharp price rises difficult to hold on to. But labour – more important for palm oil producers than grain growers – is more successful in keeping up its rates.
So grain sellers should remember that price falls will come. But buyers shouldn’t bet on values tumbling all the way back to the previous trading ranges.