OILSEEDS, OILS AND MEALS^1/

PRICES2/

Renewed strengthening of prices likely

The 2008/09 season (October/September) started with low prices. After the extraordinary rise of 2007/08, by October 2008, the FAO price indices for oilseed, oils and meals had fallen back to the level recorded prior to the surge. The price decline was triggered by the prospect of improved crop output, combined with weak demand for oilseed products. In the case of oils/fats, the downturn in energy prices also contributed to the fall in prices.

After a period of instability, in April 2009 prices in the oilseed complex started moving upward. Oil and fat prices took the lead, increasing as much as 14 percent over March 2009 (based on FAO’s monthly price index). Meanwhile, the indices for oilmeals and oilseeds grew by, respectively, 6 and 7 percent. In May, the upward trend in prices continued and all three indices rose well above the corresponding levels of 2007 (i.e. before the 2007/08 price rally started).

The recent price firming mainly reflects concerns regarding the progressive tightening of global supplies, in particular in the soybean complex. The supply problem is caused primarily by deteriorating crop prospects in South America, where soybean production estimates had to be lowered several times because of persisting, severe weather problems. The consequent rise in soybean prices has spilled over to the entire oilseeds complex. In the case of oils/fats, this year’s slow-down in palm oil production is adding to the price pull.

 

Concerns about the tightness of supplies and the resulting sharp fall in export availabilities, are fostered by sustained buying interests, for example by China and India. Overall trade is affected by a further drawdown in exporting countries’ inventories and by increased reliance on a very limited number of suppliers. With regard to consumption, it appears that, so far, the global economic recession has affected primarily meal demand and much less oil consumption.

Current market fundamentals suggest that prices for oilseeds and products should remain firm and possibly strengthen further during the remainder of the current season. The comparison of the latest 2008/09 production and stock estimates with anticipated consumption levels suggests continued market tightness until the arrival of the new season’s crops. Current market sentiments confirm this assessment: since last March, soybean futures trended upward and, in early May, CBOT’s September contract was traded at around USD 370 per tonne compared with USD 300 at the beginning of March. Market tightness and thus firmness in prices could also spread into next season considering that irrespective of a probable revival in global oilseed production, 2009/10 supplies of oils and meals will be conditioned by a very low level of carry-in stocks.

OILSEEDS

Global production forecast for 2008/09 revised downward sharply

In spite of record global oilcrop plantings, the recovery in production from last season’s exceptionally low level will be less than one percent. Following further downward revisions for crops in South America, global output is now forecast at 406 million tonnes, which is about 13 million tonnes below the record crop of 2006/07.

As to key producers in the northern hemisphere, their aggregate output has fully recovered from last season’s drop thanks to higher plantings (encouraged by high prices) and favourable weather conditions in some regions. Record sunseed and rapeseed crops were harvested in Canada, the European Union, the Russian Federation and Ukraine. However, an only partial recovery in output has been achieved in China and the United States. India reported a drop in its summer oilcrops, which, however, should be offset in part by an increase in winter crops. In the southern hemisphere, the outcome of the current harvests is expected to fall well short of initial expectations, mainly on account of strongly adverse weather conditions affecting soybean crops in South America. In Argentina, where the season started with record soybean plantings, the crop suffered from severe and prolonged drought, causing yields to shoot down. Output is currently estimated at 34 million tonnes, a five-year low and 26 percent down from last season. Paraguay’s output could even drop by 40 percent, also due to drought. In Brazil, the soybean crop has been less affected by dry weather, but output is nonetheless expected to fall (to 58 million tonnes or by 3 percent) as farmers were confronted with reduced access to credit, higher production costs and lower profit margins. In Australia, an above average rapeseed output is expected this season.

Table 7. World production of major oilseeds

Table 8. World oilseeds and products markets at a glance

OILS AND FATS3/

Weak growth in global oil/fat supplies for the second consecutive season

The latest crop forecasts for 2008/09 translate into a record global oil/fat production of over 160 million tonnes. The about average increase of 3 percent vis-à-vis last season is expected on account of record sun and rape oil production that should offset the fall in soy oil output and the slow-down in palm oil production. Unlike in recent years, the production increase will be largely on account of developed countries, mainly in Europe and North America. By contrast, aggregate developing country output is expected to decrease, mainly reflecting South America’s poor soybean crop and weak growth of palm oil in Malaysia. Global supplies of oils/fats (i.e. 2007/08 ending stocks plus 2008/09 production) are forecast to grow by only 2 percent, or well below average, for the second consecutive season. Low opening stocks explain why global supply is anticipated to grow less than production. While healthy supply growth is forecast for rape, sun and palm oil, supplies of soybean oil are again expected to fall: after falling 3 percent last season, soybean supplies may decline by 7 percent. Such reduction will be concentrated in Argentina and the United States, where supplies could fall to, respectively, seven-year and four-year lows. Also Brazil should be affected, although less strongly.

Further growth expected in global oil/fat consumption

Global oil/fat consumption is estimated to expand by about 3 percent, and thus somewhat less than average. This season, consumption growth is influenced by the global economic crisis. But the slow-down in demand is less pronounced than originally expected, also because the relaxation of prices vis-à-vis last season seems to have encouraged consumption. As to individual oils, steady growth in palm oil consumption as well as revived rape and sun oil use is required to offset the steep decline in soy oil supplies. As a result, the share of palm oil in total consumption should exceed 27 percent, while that of soy oil should drop to 23 percent. As in previous years, consumption growth in developing countries is expected to be almost double that in developed countries. In 2008/09, developing Asia alone should account for exactly half of global oil/fat consumption, with utilization climbing to new records in China and India. Among developed countries, significant consumption growth is only expected for the European Union.

Food uses should account for about half the expansion in global consumption, with the other half directed to non-food uses, notably biofuel. Demand for biofuel production is estimated to expand by about 15 percent in 2008/09, less than originally expected and in line with the gradual slowdown observed in recent years. Over the last few months, the price relationship between crude oil and vegetable oils has been such to reduce the profitability of edible oil-based fuel production. Also, in some countries, political support for biofuels has shown signs of wavering. Overall demand for vegetable oil-based fuel should nonetheless continue to grow, driven by rising national blending requirements and continued support to producers. Countries where the use of vegetable oils for biodiesel is estimated to grow further include Argentina, Brazil and the European Union. In the European Union, no less than 60 percent of overall rape oil utilization should be for biodiesel and also the importation of palm oils as fuel feedstock should continue. Also in Argentina and Brazil industrial demand for vegetable oils should rise further, thereby contributing to the fall in export availabilities. By contrast, in the United States, biodiesel demand is estimated to account for only 11 percent of domestic soy oil consumption (as opposed to 16 percent last year), as the industry is responding to lower profitability and reduced biodiesel export opportunities following the introduction of countervailing duties by the European Union.

World oil/fat inventories not likely to recover

After last season’s extraordinary drop, global oil/fat inventories (measured as oil/fat inventories per se, plus the oil contained in stored seeds) are anticipated to remain unchanged. With weak supply growth and further expansion in demand, a recovery in the stock levels will not be feasible. Individual oils are expected to fare differently: a partial recovery for sun oil and record levels for rape oil contrast with a further drop in palm oil and, in particular, soy oil inventories. With consumption by far exceeding production, the latter are estimated to settle at a five-year low. An accumulation of stocks is anticipated for Canada, China and the European Union, while inventory reductions are expected mainly in Argentina, Brazil, India, Indonesia, Malaysia and the United States. The anticipated stagnation in global stock levels should also prevent a recovery in the global oils/fats stock-to-use ratio, which, in fact, is estimated to fall below last season’s less than average level, thus underpinning the expectation of gradually strengthening international prices.

 

Below average growth expected in global trade of oils/fats

At over 83 million tonnes, world trade in oils/fats (which comprises the oil contained in traded seeds) is forecast to expand further, albeit at a below average rate. As to individual oils, global shipments in soy oil are anticipated to decline: the unprecedented 2.2 million tonnes (or 9 percent) decline in exports would be primarily on account of Argentina. Due to the country’s production shortfall (and rising demand from biodiesel producers), combined exports are set to drop by 21 percent, reaching a five-year low. Shipments from Brazil and Paraguay will also fall. The decline in soy oil is expected to be made up for by other oils, in particular palm oil. Indonesia and Malaysia are forecast to expand their palm oil sales by, respectively, 6 and 13 percent. Together, the two countries should export 2.7 million tonnes more than last season, allowing the share of palm oil in total trade to climb to 42 percent. At 15.9 million tonnes, Indonesia’s exports are estimated, for the first time, to match those of Malaysia. Thanks to their top production and attractive prices, rape and sun oil trade is expected to climb to a record level. The Ukraine should account for much of the increase in both markets. Thanks to competitive pricing and the national currency’s devaluation against the United States Dollar, the country’s share in global sun and rape oil trade should rise to 15 and 38 percent respectively. Regarding rape oil, also Canada is heading towards record shipments.

 

As to oil/fat imports (including the oil contained in imported seeds), purchases by China are estimated to grow considerably less than in previous years, due to improved oil output from domestic sources and slower growth in consumption. By contrast, a marked rise in imports is taking place in India, where the suspension of import tariffs on edible oils coincided with the fall in world market prices (as well as a drop in domestic oil output) thus spurring import demand. In general, developing countries are preferably buying low-priced palm oil. In the European Union, a rise in imports is required to satisfy internal demand for food and, in particular, non-food (biofuel) purposes. In the United States, a net exporter of oils/fats, but for a few years, also the world’s fourth largest importer, foreign purchases are expected to expand further as the food industry continues to require vegetable oils other than soybean oil to reduce the presence of trans fatty acids in food products.

MEALS AND CAKES4/

Global supplies of meals/cakes forecast to decline for the second consecutive year

In spite of the projected small rise in total oilseed production, the sensitive drop in soybean output - by far the most important source of meal, is expected to lead to a slight fall in world meal/cake output (expressed in protein equivalent). This would be the second consecutive decrease, with 2008/09 output falling to a four-year low. Record rape and sun meal output will not change the overall picture. The drop is mainly on account of South America, where aggregate meal output is estimated to fall by over 15 percent. In the two other main producing areas, China and the United States, meal output is likely to recover, although remaining below the average level achieved in recent years. The general shortfall is even more pronounced in terms of global meal/cake supplies (i.e. 2007/08 ending stocks, plus 2008/09 production). Due to last season’s unprecedented drawdown in stocks, in 2008/09, global supplies are anticipated to decline by almost 4 percent, after already falling 2 percent last season.

Unprecedented contraction in world utilization of meals/cakes

After last season’s slowdown, in 2008/09, global meal utilization (expressed in protein equivalent) is expected to shrink by 1-2 percent. While the past slowdown was triggered by the 2007-08 surge in prices, this season, consumption is affected by the negative impact of the global economic recession on meat demand. In some regions, for example the European Union, increased availability of feedgrains is adding to the demand pressure. The European Union, North and South America, which together account for about half of global consumption, should see an unprecedented decline in meal demand. By contrast, in Asia, led by China, meal use is forecast to grow further, although by a below average rate of 2 percent. As to individual meals, soybean meal will be most affected. The healthy expansion expected in sunflower and rapeseed meal will not be sufficient to offset the decline in soymeal consumption.

Decline in global meals/cakes inventories anticipated to continue

After last season’s extraordinary decline in world meal/cake inventories (measured as meal/cake inventories per se, plus the meal contained in stored seeds), global inventories are expected to drop further in 2008/09. With global meal consumption forecast to exceed production by 3 million tonnes (in protein equivalent), a marked reduction in inventories will be inevitable. Dropping by 9 percent over last season, global meal stocks would be more than one-quarter below their 2006/07 level. The decline in stocks will be primarily on account of soybean meal. Brazil and the United States opted for a run down of their stocks in order to raise exports, whereas Argentina’s reduction in stocks is meant to contain the fall in shipments. By contrast, higher inventories are expected in China, based on better domestic crops and a revival of public purchases for state reserves. A comparison of global supplies with global consumption and the global stock-to-use ratio indicates that world meal markets are tightening further in 2008/09. With a stock-to-use ratio estimated between 12 and 13 (compared with 14 and 17, one and two seasons ago) a firming up in international meal prices appears likely.

 

Global trade in meal/cake forecast to decline

After four consecutive seasons of healthy growth, trade in meals/cakes (including the meal equivalent contained in oilseeds traded and expressed in protein equivalent) is forecast to fall by an unprecedented 4 percent. With soymeal trade anticipated to decline by over 3 million tonnes or 6 percent, the rise expected for other oilmeals will have an only limited impact. The decline in soymeal shipments will be almost exclusively on account of Argentina and, less strongly, India and Paraguay, all due to domestic crop shortfalls. In Argentina, where shipments are anticipated to drop almost 20 percent vis-à-vis last season, conflicts between farmers and the Government regarding export taxation have aggravated the export situation. With an only modest increase in shipments expected from Brazil, the market depends heavily on supplies from the United States. The country is expected to raise soymeal shipments to an all-time record, but to do so a steep reduction in inventories will be necessary. As to other meals, record shipments are expected for both, rapeseed meal (from Canada and the Ukraine) and sunseed meal ( Ukraine).

With respect to meal imports (including the meal equivalent contained in oilseeds traded), several key buyers are expected to reduce their purchases, be it on account of internal supply and demand factors or because of this season’s reduced export availabilities. In the European Union, the world’s top buyer, an unprecedented 7 percent drop in imports appears likely, considering improved domestic supplies of both oilcrops and feedgrain. In China, a slight decrease in imports is expected, based on ample domestic supplies and a slow down in consumption. Also other countries in Asia should import less as domestic consumption is exposed to the effects of the economic recession.

 

PROSPECTS FOR 2009/10

Current supply tightness possibly stretching into next season

Increasing market tightness and the recent improvements in world prices for oilcrops, oils and meals should encourage farmers to maintain and possibly raise the area sown to oilcrops for marketing in 2009/10. The main support to 2009/10 production should, however, stem from a return to average yield levels in soybean cultivation. Assuming average weather conditions and thus a return to long-term yield trends, as well as a repeat of this season’s oilcrop area, global oilseed production could expand significantly in 2009/10.

Spring plantings of 2009/10 oilcrops will soon come into full swing in the northern hemisphere, whereas, in the southern hemisphere, new season sowings will only begin towards the end of this year. Soybean plantings are estimated to remain at, or slightly exceed, last year’s record level in the United States, as soybeans appear to compete favourably with maize in terms of price and production costs (see Figure 9 in coarse grains section). With yields following the long-term trend, production could expand by 8 percent, reaching a near-record level. In South America, a modest expansion in sowings and a return to average yields would allow aggregate production of Argentina, Brazil and Paraguay to rise by one-quarter. At the world level, soybean production is tentatively forecast to grow by 13 percent, slightly exceeding the 2006/07 record. However, the rise in soybeans could be partly offset by declines in rapeseed, sunflowerseed and possibly also cottonseed and groundnuts. Lower output estimates for these crops are based on the assumption of normal weather conditions (and thus yield level) as opposed to the ideal conditions met in some regions during 2008/09.

In spite of the prospected significant increase in total oilcrop production, growth in 2009/10 supplies of oilseeds and products is going to be constrained by the exceptionally low level of 2008/09 carry-out stocks. Supposing an average expansion in oil and meal demand, and considering that there will be an urgent need to replenish stocks in key exporting countries, the recent tightness in the market for oilseeds and products is unlikely to disappear, at least during the first half of next season. Consequently, world prices for oilseeds and products should remain firm but also volatile, depending on weather developments and other sources of uncertainty, such as the further course of the financial and economic crisis, the development of energy prices and changes in national trade, production and biofuel policies.

1.  Almost the entire volume of oilcrops harvested worldwide is crushed in order to obtain oils and fats for human nutrition or industrial purposes and cakes and meals used as feed ingredients. Therefore, rather than referring to oilseeds, the analysis of the market situation is mainly undertaken in terms of oils/fats and cakes/meals. Hence, production data for oils (cakes) derived from oilseeds refer to the oil (cake) equivalent of the current production of the relevant oilseeds, i.e. do not reflect the outcome of actual oilseed crushing nor take into account changes in oilseed stocks. Furthermore, the data on trade in and stocks of oils (cakes) refer to the sum of trade in and stocks of oils and cakes plus the oil (cake) equivalent of oilseed trade and stocks.

2.  For details on prices and corresponding indices, see appendix Table A24

3.  This section refers to oils from all origins, which, in addition to products derived from the oil crops discussed under the section on oilseeds, include palm oil, marine oils as well as animal fats.

4.  This section refers to meals from all origins, which, in addition to products derived from the oil crops discussed under the section on oilseeds, include fish meal as well as meals of animal origin.