November 28, 2019 / 9:45 AM / 9 days ago

China soy, palm oil markets surge on swine fever spillover

SHANGHAI (Reuters) - Investors have stampeded into China’s edible oil markets, drawn by the volatility caused by the nation-wide outbreak of African swine fever that curbed oilseed crushing, slashed pork output and forced food courts and restaurants to change up menus.

Open interest in Dalian Commodity Exchange soybean oil and palm olein futures hit a record this week, while traded volumes in the markets scaled multi-year highs. Prices for both commodities climbed to their highest since mid-2018.

“Soyoil and palm are getting a lot of interest. Fundamentally, since soybean crushing is slow due to (African swine fever), there isn’t much soyoil and that’s driving up prices for soyoil and palm oil,” said Darin Friedrichs, senior commodity analyst in Asia at brokerage INTL FCStone.

“But now it’s gotten very volatile and there’s a lot of speculative trading.”

(GRAPHIC: China edible oil markets see surge in activity as African swine fever roils food markets - here)

Soyoil, widely used in food preparation and manufacturing, is a byproduct of crushing soybeans for meal that is used to make feed for China’s huge livestock sector. African swine fever, however, has nearly halved China’s pig herd in the past year, cutting soymeal demand and soyoil output.

Higher edible oil consumption in food has also been supportive, as food makers have increased oil content to make up for serving less fatty pork in daily staples.

To help fill the supply gap, China imported 4.43 million tonnes of palm oil - a soyoil substitute - in the first ten months of 2019, a 23% increase from total imports last year. CNC-PLMOIL-IMP

(GRAPHIC: China's imports of palm oil have increased to offset a shortage of soybean oil - here)

Open positions in soyoil DBYcv1 and palm olein DCPcv1 futures rose to record highs of around 750,000 and 714,00 contracts on Nov. 20, respectively, from around 450,000 and 300,000 contracts on Oct. 8.

They have since decreased slightly, but remain near historic highs. Volumes have also surged to multi-year or record highs.

Lower-than-expected palm oil output and an increase in the planned use of palm oil for biodiesel in top producer Indonesia have also fuelled bullish sentiment, said Shi Hengyu, chief analyst of vegetable oils at Luzheng Futures.

“The oils markets recently, especially palm oil, are really hot. There is news to speculate on,” said Shi.

Meanwhile, China’s soybean inventories CFD-SBSTK-NATN have slumped to four-year lows, as imports fell from a year earlier due to the nation’s shrinking pig herd and its trade war with the United States.

(GRAPHIC: China's soy oil stocks slump to 4-year lows - here)

China has begun rebuilding its hog herds, which should increase demand for soy products, but it is unclear how quickly production can recover.

“Soy products will be an increasing area of interest for traders because of their link to the pig cycle,” said a Shanghai-based trader who could not be named.

“There is long-term volatility there so it will trade well next year.”

Reporting by Emily Chow in Shanghai, with additional reporting by Hallie Gu in Beijing; Editing by Tom Hogue

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