Vegetable oils prices soar on demand for no trans, biodiesel

by Ron Sterk
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KANSAS CITY — Vegetable oil prices have been strong for months, boosted by the shift toward no trans fat oils and increased demand for biodiesel. But prices of some products have soared in the past couple of weeks as crude oil prices hit record highs.

Despite the shift away from soybean oil to edible oils with no or low trans fat the past two years, soybean oil futures at the Chicago Board of Trade climbed to 23-year highs in the past two weeks. The surge was attributed to increased demand for soybean oil to make biodiesel fuel as crude oil futures prices hit record highs, topping out at $90.50 a barrel at the New York Mercantile Exchange on Oct. 25. December soybean oil futures prices posted a recent high of 40.99c a lb on Oct. 18, up 47% from a year ago. July 2008 and other forward soybean oil futures contracts traded above 42c a lb last week.

Paul Meyers, vice-president of commodity analysis for Connell Purchasing Services, Berkeley Heights, N.J., expected nearby soybean oil futures to continue to trade in the 39@41c a lb range for the next five to six months.

"I don’t see a lot of downside from 39c," Mr. Meyers said. He noted strong demand for biodiesel and exports were supportive. Shrinking world stocks and solid demand will keep prices strong, he said.

Although a distant second to corn-based ethanol in volume produced and used in the U.S., soybean-based biodiesel appears to be suddenly catching on, although much of the production is being exported to Europe. The U.S. Department of Agriculture has indicated about 25% of U.S. biodiesel is exported, but some in the trade put the volume as high as 40%.

The U.S.D.A. has increased its projected use of soybean oil to make biodiesel in 2007-08 by 700 million lbs in the past two months, to 4,200 million lbs, and up from 2,900 million in 2006-07. The average price of soybean oil was projected to range from 34.50@38.50c a lb in 2007-08, up from 31.02c in 2006-07 and 23.41c in 2005-06.

Cash soybean oil was quoted at 38.50c a lb, basis Decatur, Ill., on Oct. 19, up 47% from a year ago.

Price changes in most other popular oils were even more dramatic, with values significantly above year-ago levels. As of Oct. 19, cottonseed oil was at 52.75c a lb, up 88% from a year ago. Palm oil was 45.75c a lb, up 87%. Coconut oil was at 47.25c a lb, up 60%. Corn oil was quoted at 60.50c a lb, more than double the year-ago price of 25.50c.

Peanut oil on Oct. 19 was at a nominal 74c a lb, up 37% from last year; sunflowerseed oil at 75c, up 40%, and canola oil at 51c, up 44%.

Palm oil futures traded in Malaysia hit all-time highs the past two weeks, despite strong seasonal production. Use of palm oil to make biodiesel in Asia and strong exports have kept supplies tight, trade sources indicated.

Unlike soybean oil and palm oil, which are characterized by very large stocks, most other oils are in tight supply, with some supplies at risk to run out during the crop year, possibly forcing users back to soybean oil, Mr. Meyers said.

No trans fat oils, such as corn oil, sunflowerseed oil, canola oil, cottonseed oil and palm oil, have seen a second "wave" of demand, Mr. Meyers said. The first demand surge came when new trans fat labeling requirements went into effect for food manufacturers on Jan. 1, 2006, he said. Sunflowerseed oil supplies have been especially tight since Frito Lay switched to no trans fat oils exclusively last year, for example.

But a second demand wave came in the past several months as the food service industry began switching to no trans fat oils, Mr. Meyers said. Numerous fast-food and other restaurant chains have announced the switch in recent months.

"Supplies of no trans fat oils are tighter than they ever have been," Mr. Meyers said. There is especially "no relief" in sight for corn oil, sunflowerseed oil and canola oil, he added.

The September fats and oils component of the Consumer Price Index for All Urban Consumers reported by the Bureau of Labor Statistics was up 4.6% from six months earlier, on a seasonally adjusted basis. That compared with increases of 5% for the overall food category and 20.8% for dairy during the same period and indicated food manufacturers have been slow to pass on increases in vegetable oil prices, trade sources said.

Mr. Meyers expected soybean oil supplies to remain tight, despite an expected sharp increase in 2008 soybean plantings in the U.S., because oilseeds globally will be fighting with wheat for acres next year. He expected U.S. soybean planted area in 2008 to increase 5 million to 6 million acres, compared with a decrease of about 12 million acres in 2007 from 2006. But other oilseeds, such as canola and sunflowerseed grown in the northern Plains, will have to compete for acres with spring wheat and durum, which have been at record high prices.

Meanwhile, biodiesel production continued to expand. According to the National Biodiesel Board, 84 plants currently are under construction or expanding and could add an estimated 1.37 billion gallons, or nearly 75%, of capacity in the next 18 months.

Soybean oil exports remained strong. U.S. soybean oil export sales commitments through Oct. 18 were 15% ahead of the same period last year.

The combination of high crude oil prices, strong soybean oil demand and high prices for grains that compete for acreage with soybeans will make it a "struggle to get the market down," Mr. Meyers said.

This article can also be found in the digital edition of Food Business News, October 30, 2007, starting on Page 1. Click here to search that archive.

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