Brazilian soyoil arbitrage shifts exports to heated domestic market

16 Jul 2020 | Rei Geyssens

The tight supply of soyoil in Brazil and firm demand from the country’s biodiesel sector has opened up an arbitrage between Paranagua’s soyoil export market and the domestic market, with traders able to make up to $44/mt per trade, according to Agricensus data.

A record export campaign has meant a lack of soybeans is starving the Brazilian biodiesel sector of its key feedstock, soybean oil, and local biodiesel producers are forced to outbid the export market to attract supply.

Prices have now reached a level where traders who have already sold export volumes forward are incentivised to cover their positions from elsewhere and resell the soybeans domestically.

Brazilian soyoil prices on a FOB Paranagua basis surged to a five-month high this week of $738/mt for August shipment, according to Agricensus data.

That equates to a 470-point premium over the August CBOT soyoil contract, while the local market is trading an additional 200 points, or $44/mt, higher than the prices at port.

“Old crop is very firm due to domestic bio demand in Brazil. People are covering shorts to export and re-selling to the domestic [market]. Even if they pay [a premium of] 500 points for August oil, it can be sold domestically, making a cool 200 points,” a Brazilian broker said.

The arbitrage between the export market and the domestic market could be closed “but it will take time”, the broker said, adding that the available shorts to cover on the export market are limited and traders cover only around 1,000 mt per trade.

“The domestic market needs the oil badly... so they are outbidding exporters,” a second Brazilian broker said.

All biodiesel volumes in Brazil are sold through public auctions organised by Brazil's Petroleum, Natural Gas and Biofuels Agency (ANP) to ensure the country can meet its mandated blending target for biodiesel with road diesel fuel, currently set at 12%.

“The major reason for this boost in soyoil prices is the latest ANP auction, which turned out to be an impressive price rise, despite Covid-19 and all its hindrances,” the second broker said, referring to firm demand for road diesel in spite of lockdown measures.

In its most recent biodiesel tender, which closed in early June, ANP reported prices for biodiesel 8.3% higher than the previous tender at BRL3.8/litre ($0.71/l).

That price is 66% higher than the average price paid at a similar time in 2019, while volumes sold have climbed nearly 15% over the same period.

“There will be another bio auction at the beginning of August. That’s when September soyoil prices will hit the roof,” the first broker predicted.

Argentine soyoil to bring relief?

With Brazil’s new crop soybean harvest still seven months away, the world’s largest soybean producer and exporter is expected to remain short of beans and oil into early 2021, which has already triggered an increase of imports of Paraguayan beans – albeit in limited volumes.

Another option would be to import soyoil directly from neighbouring Argentina – the world’s largest soyoil exporter – but that dynamic does not make economic sense, at least for now.

Domestic soyoil in Brazil is trading at around $730/mt – equivalent to a FOB price of $770/mt when assuming $40/mt for internal freight costs – while current FOB prices at port amount to around $740/mt.

Delivering Argentine soyoil to Paranagua equates to around $755/mt CIF, which translates into a domestic price of $795/mt – when assuming the same internal freight rate – and is some $55/mt above the domestic market.

“So even though domestic prices are 200 points over export, it's still 300 points under import parity,” the first broker said.

While the premium of Brazilian soyoil over Argentinian soyoil has surged to more than $30/mt, compared with a more typical $10/mt, it will need to gain another $60/mt to trigger imports.

“Within some months... I bet we will import oil from Argentina,” the second broker added. “Our forecast over here is that in Q4 Rio Grande do Sul will import Argentine soyoil.”

Current Brazilian regulations mean that any Argentine soyoil imports will not be eligible for use in the biodiesel sector, however, although it can be used in the food sector.