Viewpoint: Europe RSO supported by weak harvest

Global rapeseed supply and stocks will tighten towards the second quarter of 2019, a result of weaker harvests following drought in major producing regions. That will support prices for the seed and for end-product crude rapeseed oil (RSO).

However, the extent of substitution by rival oilseeds will dictate the support level, just as it has through the fourth quarter of 2018.

The European Commission estimates a yearly decline of 10pc in rapeseed output for the 2018-19 harvest, to 19.8mn t from 22mn t in 2017-18 and 8pc below the five-year average of 21.6mn t.

The French government forecasts an 8pc fall in domestic 2018-19 production to 4.9mn t from 5.4mn t in the previous harvest, a significant shortfall for the EU's largest rapeseed market. Germany — the second largest EU market — will see its rapeseed harvest decline by 24pc on the year, or 1mn t, to 3.3mn t.

Production shortfalls are not limited to Europe. The International Grains Council (IGC) has estimated global 2018-19 rapeseed production will fall by 5pc to 70.6mn t, with a sharp decline in Australia and a more moderate fall in Canada.

The IGC estimated global rapeseed consumption will rise by 500,000t to 73.8mn t, pressuring ending stocks of major exporters — such as Australia, Canada and Ukraine — down by 21pc to 2.7mn t for 2018-19. Any shortage in export capacity in these markets could drive European seed prices higher.

The commission has estimated rapeseed imports rose by 30,000t, or 2pc, year on year from 1 July to 16 December 2018, to 1.97mn t, with 84pc of this from Ukraine.

Australia exports the lion's share of its rapeseed output to the EU after its winter harvest in November-December. Australian output — traditionally representing the EU's principal supply of non-domestic product — could decline by 39pc for the 2018-19 marketing year, to 2.2mn t.

Sowing of European rapeseed this year was once more down, compared with the previous year, which might result in even weaker 2019-20 output. Dry weather caused significant cuts in areas sowed in countries including France and Germany — first estimates put the area sowed in those two countries down by 24pc and 18pc year on year, respectively.

RSO prices reached a €732/t average by the end of the EU harvest in August, compared with a five-year average of €703/t. The increase was mostly a result of a weak EU output. The RSO contract for September priced at €719/t this year, below August's average but still above the five-year average €708/t.

Euronext rapeseed front-month futures prices averaged €379/t in August, €18/t higher than the five-year average for the same month. This continued into September and October, with 2018 prices at €370/t and just below €373/t compared with the five-year averages of €360/t and €366/t respectively.

Low water levels on the Rhine river have compounded the supply squeeze, limiting barge capacity utilisation since July and driving up costs for oilseed deliveries and for the transport of crushing products such as rapeseed meal. Rhine levels have been above average since the beginning of December, but forecasts show the river will not return to steady levels until spring.

But as EU RSO prices strengthened on the back of pessimistic harvest forecasts — in a period not generally associated with high demand — so too did demand for other rival vegetable oils. As winter approached, European rapeseed market values came under pressure from imports of cheaper soybeans.

Additionally, downward price movements of crude through November weighed heavily on the vegetable oil complex. RSO prices averaged €756/t in October, compared with a €733/t five-year average for the month. However, prices fell by more than €30/t from 12 November to 27 November to average €728/t for that month, below the €760/t average in November 2017 and below the five-year average €741/t.

The Euronext rapeseed futures front-month February contract averaged just above €373/t in November, slightly higher on the month, almost flat from the five-year average and €4/t lower year on year, showing signs of demand weakness also.

Rapeseed futures for February 2019 reached a two-month low on 26 November, to just less than €367/t. This is unusual during winter, when the seed is in high demand as an RSO input for biodiesel feedstock as temperatures in Europe fall.

Competition has largely come in the form of soybean imports into the EU, which were up by 13pc at 6.47mn t by in the 1 July-16 December period, compared with 5.72mn t for the same period a year earlier. The US was the source of 4.7mn t, or 73pc of the total.

Rapeseed oil has a historical link to the US soybean complex — when the RSO/soybean oil (SBO) premium increases significantly, European blenders will import soybean or SBO for biodiesel production.

US cargoes made their way to Europe after a 25pc import duty was imposed on US product by China.

The level of soybean volumes imported from the US and crushed to produce oil and meal will remain a major contributing factor tempering demand for rapeseed and RSO into 2019. While rapeseed methyl-ester (RME) has a cold filter plugging point (cfpp) of around -13C to -15C, soybean methyl ester (SME), with a cfpp of around -5C can act as a partial substitute for winter diesel blending. Major European crushers preferred cheaper feedstocks in 2018, limiting the activity for smaller rapeseed crushing companies.

RSO early winter prices have been short of farmers', and traders' expectations. The current price trend has led to many EU farmers retaining their oilseeds to sell later, according to German oilseeds association Ufop.