European rapeseed prices are currently undervalued, in our opinion, in view of this season’s prospective severe supply shortage. Latest official data indicate an even lower than previously estimated harvested area in Germany, France, the Czech Republic and several other countries. Also yields reportedly fell short of expectations, necessitating a further downward revision in our EU rapeseed crop estimate by 0.4 Mn T to 17.1 Mn T (vs. 19.9 Mn T in 2018).
Further deteriorating EU supplies are currently not reflected in rapeseed prices with nearby futures on the MATIF up only 1-2% in the month to August 15. Here are key implications of these diverging fundamental and price trends:
1) Relatively low rapeseed and high rapeseed oil prices have created favourable processing margins at least in the nearby, boding well for rapeseed crushings in the first half of the season and postponing most of the required demand rationing to Jan/June 2020.
2) Reserved farmer selling in the EU owing to disappointing yields and prices, is partly offset by record EU rapeseed imports from Ukraine in July and August. However, the combined increase in production in the C.I.S. countries of 0.7 Mn T this year is insufficient to offset the steep 2.8 Mn T decline shaping up in the EU.
3) EU farmers are losing interest in rapeseed cultivation. Another small winter rapeseed area would create an even more bullish price outlook for the 2020/2021 season. The recent downtrend in yields and prolonged dryness in key rapeseed producing regions are likely to limit the recovery in winter rapeseed sowings in 2019. In Germany several market observers indicate a risk of an even smaller area than the 0.9 Mn ha planted in 2019 (the lowest area in more than 20 years).
Even though the current rapeseed/wheat price ratio is favouring rapeseed cultivation at least from a historic perspective, farmers across Europe are reportedly reluctant to sizeably expand sowings this year. Political changes to phytosanitary guidelines in the EU, primarily the ban on neonicotinoids, declining yields and relatively low prices significantly curbed the profitability per hectare in recent years.
These factors suggest that a reversal of the current price trend in the EU is imminent in order to 1) achieve the required demand rationing, 2) revive farmer selling and 3) stimulate plantings. Rapeseed prices will be additionally supported by the prospective tightening of world vegetable oil supplies. Following two years of production surpluses in palm oil, world demand is expected to exceed production in July/Dec 2019 and in calendar year 2020, supporting prices in the near to medium term.
Those farmers, who increase winter rapeseed sowings this year contrary to the general trend, are likely to benefit from the high prices anticipated for 2020 and probably also in 2021.
OIL World (ISTA Mielke GmbH, Hamburg)