Saturday, July 16, 2011

Edible Oil Prices Revisited

On July 15, the National Development and Reform Commission held a press conference where officials announced that edible oil prices will remain stable in the second half of the year. The increase in retail vegetable oil prices will not as large as people think. The main reason NDRC gave was that China is largely dependent on imported soybeans and vegetable oil. International output has increased, thus stabilizing prices.

An article from China Fats and Oils network sums up the edible oils market as "oil weak, meal strong." It says companies are inclined to raise prices to cover rising costs, but they hesitate to do since final demand for their products is not that strong. Meanwhile, soy meal demand is strengthening as high prices for pork stimulate a build-up of hog inventories and demand for feed rises.

The article reports that Luhua Company backed off its plan to raise prices. Media reports last week reported that Luhua, mainly a peanut oil producer, was planning to be the pioneer in increasing the price of edible oil products. Other companies were expected to follow. There are now some reports that the plan to raise prices has been canceled and the article says, "We still don't know whether or not Luhua is raising its price."

Perhaps Luhua company's communist party secretary got a call from the NDRC telling him it would be a good idea to cancel the price increase. Just a thought...

A Q&A posted on the sohu web site expresses skepticism about the NDRC's optimistic outlook. The NDRC spokesman emphasized the anticipated record corn and rice crops expected in northeast China, but the skeptics note that the big increase in corn and rice area also means a big decrease in soybean area. Falling domestic soybean output could mean higher soybean and oil prices later in the year.

An official addressed this question by referring again to the stable prices and high inventories in international markets reflected in USDA's July report. He pointed out the price fluctuations are not like those in earlier years when old ladies went on a panic-buying binge, prices shot up and then fell just as rapidly. The official said that the government is watching the situation closely and will take necessary measures if needed.

What's missing from this debate is the recognition that market conditions differ for different types of oilseeds. Soybean prices have been relatively stable, but peanut prices have been climbing since April (see chart below). Luhua produces peanut oil; that's why they are eager to raise prices. Rapeseed prices are also starting to rise.

Data source: National Grain and Oils Information Center price monitoring data. Peanuts in Shandong, Rapeseed in Anhui, Soybeans at Dalian.

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