Food Outlook No.5 - December 2002 p.12

Oilseeds, Oils and Oilmeals¹

Prices for oils/fats and oilcakes/meals to continue their recovery in 2002/03

The tight supply outlook for oils and fats projected for the 2002/03 (October/September) season calls for an increase in international prices for oils and fats. Supply constraints in the current season include stagnation in output growth, compounded by low carry-in stocks. Prices during the first two months of the season, as depicted by FAO's price index for oils and fats, have moved much higher compared to the same period of the previous season. The extent of the price rise during the season as a whole will depend on the developments of the South American soybean crop and the eventual level of global stocks. The dependence on soybean oil, as well as meal, is explained by the limited availability of most of the other alternatives this season; and the relevance of the forthcoming South American crop comes from the fact that soybean output from the major producers in the northern hemisphere is estimated much lower than in the previous season.

The situation in the oilcakes and meals sector is expected to be similar to that of oils and fats, with the declining stocks-to-use ratio supporting a strengthening of prices. FAO's price index for oilcakes and meals has risen during the first two months of this season. But, unlike the oils sector, little or no demand expansion is expected for oilcakes and meals and this should limit the extent of a price rise in the sector. Given the fundamentals in the oilseeds complex as a whole, it is expected that the oils and fats sector will assume the price leadership role, similar to the situation in the previous season.

Growth in global oilseeds production to stagnate

World production of the seven major oilseeds during the 2002/03 season is forecast to show little or no increase from the 2001/02 estimate due to weather-related problems in different regions of the world. With the exception of soybeans and sunflower seed, the production of most of the other oilseeds is forecast to fall.

International Prices of Oilseed-Based Products

Source : FAO, Oil World

a/ Soybean, US, cif Rotterdam. b/ Soybean oil, Dutch, fob ex-mill. c/ Palm oil, crude, cif N.W. Europe. d/ Soy pellets, 44/45%, Argentina, cif Rotterdam.

World Production of Major Oilseeds

Source : FAO

Note : The split years bring together northern hemisphere annual crops harvested in the latter part of the first year shown, with southern hemisphere annual crops harvested in the early part of the second year shown. For tree crop, which are produced throughout the year, calendar year production for the second year shown is used.

Harvesting of the crops in the northern hemisphere countries is progressing well and nearing completion while the season is just getting started in the Southern Hemisphere. Continuing the trend of the last two seasons, output of soybean is forecast at a record level. This forecast assumes that soybean production gains in Argentina and Brazil will more than offset the lower crop expected in the United States, the world's largest soybean producer. The lower crop in the United States is attributed to unfavourable growing conditions that affected both harvested area and yields.

Output in some of the other big producers is also anticipated to decline. In China (Mainland), oilseeds production is expected to fall as a result of flood-related crop damage. In India, erratic monsoon rains led to unfavourable growing conditions for most crops. In Canada, rapeseed output is expected to fall for the third consecutive season largely due to exceptional droughts that have hit western Canada. Rapeseed crop losses are also expected in China, Australia and the United States. On the other hand, oilseeds output in the Russian Federation and Ukraine is projected to increase owing largely to a recovery in sunflower seed production.

In South America, as planting of the current season's oilseeds crop continues, expectations of higher prices are anticipated to favour an area expansion at the expense of competing crops. In Argentina, sunflower seed and soybeans could also benefit from the unfavourable/wet conditions that are making it difficult to plant all the intended area to wheat and corn. In Brazil, although soybean planting has been slowed down by adverse weather, total soybean acreage is forecast to expand encouraged by positive market signals. Assuming good growing conditions during the season, the two countries could register yet another record soybean harvest. It should be pointed out that the final decisions in the two countries will be influenced by the availability of credit, the cost of agricultural inputs and other variables that are linked to the performance of the countries' exchange rate and related macroeconomic policies.

Output growth of oils/fats and oilmeals/cakes to stagnate²

Based on current crop forecasts, global output of oils and fats in 2002/03 is expected to expand only marginally from the previous season's level. Similar to the last two seasons, rapeseed oil output is projected to fall but, unlike the previous two seasons, sunflower oil production is forecast to experience a modest increase, owing to an anticipated recovery in output in some of the major producing countries including Argentina, the Russian Federation and Ukraine.

Of the ten major oils, only soybean, sunflower, palm kernel and fish oil are expected to register an appreciable increase in output; the production of all the other oils is forecast to either stagnate or drop. In recent seasons, palm oil, the largest consumed oil globally, has compensated for the output reduction in some of the other major oils. However, the high growth rates of palm oil production during most of the 1990s slowed down in 2001/02 and limited growth is expected in the current season. This is partly due to lower average yields, caused by palm oil prices which have trended downwards during much of the 1998-2001 period, inducing farmers to reduce their use of fertilisers and herbicides. In addition, a replanting campaign that started during the last season in Malaysia, the world's biggest palm oil producer, is contributing to slower growth in output.

The overall supplies of oils/fats during the 2002/03 season are expected to be tight as the projected stagnation in production growth is compounded by a reduction in the global carry-over stocks from the previous season.

With regard to oilcakes and meals , world production expressed in protein equivalent is expected to increase only marginally from the previous season. The anticipated shortfall in production of some major meals is unlikely to be compensated for by an expansion in soymeal as it was in the past two seasons.

The output of four of the eight major oilcakes and meals produced worldwide is expected to decline. Rapeseed meal in particular, the second largest meal produced, is set to decline for the third consecutive season due, mostly, to weather-related problems in the major rapeseed producing countries. In contrast, the declining trend in sunflower meal production is projected to end. Other meals expected to register an increase in production include soybean, fish and palm kernels. Overall meal supplies during the season are forecast to be lower than the season before owing to the much reduced carry-in stocks, compared to the previous season.

Growth in the global utilisation of oils/fats and oilcakes/meals to slow down

World utilisation of oils and fats in 2002/03 is forecast to expand only marginally from the previous season's level. Given the limited growth in overall supplies projected for the season, a demand-rationing price rise seems inevitable thereby hampering the consumption growth, especially in a number of developing countries where demand is very price elastic. Furthermore, demand growth is anticipated to be curtailed by the ongoing economic slowdown in many parts of the world. With regard to individual oils/fats, the growth in overall consumption of soybean and palm oil is forecast to surpass that of the previous season, albeit at the expense of inventories. This will help offset the reduction expected in the use of many of the other oils, with the exception of sunflower oil, the consumption of which is projected to expand after three years of decline.

Oilseeds and products: Global supplies, trade and utilization

Source : FAO

Note : Refer to footnote 1/ in the text for further explanations regarding definitions and coverage.

1/ Includes soybean, rapeseed, sunflowerseed, groundnut (unshelled), cottonseed, copra and palm kernel. The split years bring together Northern Hemisphere annual crops harvested in the latter part of the first year shown and Southern Hemisphere annual crops harvested in the early part of the second year shown. For tree crops, which are produced throughout the year, calendar year production for the second year shown is used. 2/ Includes oils and fats of vegetable and animal origin. 3/ Production plus opening stocks. 4/ Residual of the balance. 5/ All meal figures are expressed in protein equivalent. Meals include all meals and cakes derived from oilcrops as well as fish meal.

After several years of steady expansion, global utilisation of oilcakes and meals , expressed in protein equivalent, is expected to stagnate at close to the previous season's level, as a result of several factors. The marked consumption growth during the last couple of seasons was largely due to the continuation of the ban on the use of MBM in compound feed in the EU and a recovery in global meat production. While the feed industry has now adjusted to the ban, livestock production growth is forecast to slow down in a number of major producing countries due to reduced profitability stemming from higher production costs and comparatively lower slaughter prices. Secondly, bad weather in some EU countries (the largest consumers of oilcakes and meals) has negatively affected the quality of wheat. This could lead to a larger than usual availability of high protein-containing wheat for feed uses, thereby reducing the need for supplementary protein meals. With regard to the individual oilmeals, the reliance on soybean meal to meet global demand is expected to increase.

The end-of-season stocks of oils/fats and oilcakes/meals are forecast to decline

Based on the expected demand and supply scenario for the 2002/03 season, a decline in the global end-of-season stocks of oils and fats (including the oil contained in seeds stored) seems inevitable. If the forecast stock decline materialises, it would be the third consecutive season of lower end-of-season inventories. Major stock holding countries, such as the United States, China, India, Malaysia and others, are forecast to see their stocks plummet to levels not observed in recent years. The projected global closing stock level would be the lowest since the 1994/95 season. Inventories of all the oils are anticipated to decrease and the resultant fall in the stocks-to-use ratio would provide upward support to oils/fats prices during the season.

Similar to the oils sector, the oilcakes and meal sector is also expected to see consumption exceeding production and thus a decline in stocks to levels below the average of recent years. Unlike the previous season when ample availability of soybeans allowed an above average crush of soybeans, such an option is bound to be limited during the current season due to the projected slow down in the production growth of soybean. Like the oils sector, the implied lower stocks-to-use ratio is expected to contribute to higher prices.

International trade of oils/fats and oilcakes/meals forecast to show a modest increase

For the second consecutive season, the demand for oils and fats is expected to lead trade in the overall oilseeds complex. Lower production in the major consuming countries, especially those in Asia, will be the main driving force behind an increase in world import demand (including the oil contained in oilseeds traded). Imports by China (Mainland) are forecast to expand by about 12 percent compared to the previous season. In addition to reduced domestic output, the country will need additional supplies to alleviate the gap that was created during 2002 as a result of the introduction of new rules governing importation of GMO-containing products and of difficulties in the administration of tariff rate quotas.

India's imports are expected to record yet another big increase. In addition to lower domestic output forecast for the key oils, a number of traders chose not to make contractual arrangements towards the end of last season in anticipation of a possible reduction of import duties by the government. As a result, meeting domestic demand has necessitated a depletion of stocks to very low levels in recent months and imports will be required to satisfy demand and replenish stocks.

Import purchases by numerous other developing countries (including big importers like Turkey and some eastern European countries) are forecast lower, due to a combination of expected improvements in domestic production, weak economic outlook and the likelihood of higher global prices that could limit import demand from some of those countries.

Imports by the EU, the largest importer of oils (including the oil contained in oilseeds purchased) are projected to expand only slightly to make up for a stagnation in output and a small increase in demand.

On the export side, the growth experienced in recent years will likely slow down during the 2002/03 season largely due to limited availability of oils and fats and reduced demand growth in several importing countries. In particular palm oil, whose exports increased steadily during most of the 1990s, could see a stagnation during the current season. The growth in export shipments by Malaysia and Indonesia, the two major exporters of the commodity, has declined strongly in recent seasons vis-à-vis the 1990s; a consequence of lower growth in output.

With regard to soybean oil exports (including the oil contained in soybean shipments), sales from Argentina and Brazil are expected to increase owing to the combination of availability and favourable exchange rates. On the other hand, shipments by the United States, the largest soybean and products exporter globally, are forecast to decline for the first time in four years as export supplies are anticipated to be limited. Global exports of rapeseed oil are anticipated to decline for the third consecutive season owing to the forecast lower output by Canada and Australia, the two major exporters. By contrast, shipments of sunflower oil could recover.

World trade in oilcakes and meals (including the meal contained in oilseeds traded) is expected to expand but at slower rate than that of recent seasons. This is mostly attributed to the anticipated slow down in the utilisation of protein meals in a number of the major consumingcountries emanating from reduced profitability of livestock production. In the EU, traditionally the largest importer of oilcakes and meals, imports are expected to rise only minimally since, in addition to the profitability issue of the livestock enterprises, increased feed wheat supplies are bound to lessen the need for imported protein meals. On the other hand, imports by China (Mainland) are bound to rise appreciably mainly as a result of a shortfall in domestic production.

Although global export availabilities are not anticipated to expand by a big margin, relative to recent seasons, the increase will likely be enough to satisfy the moderate rise in import demand during the season. Of the three major exporters (United States, Argentina and Brazil), shipments from United States, usually the leading exporter, are projected to decline, for the first time since the 1998/99 season, due to lower domestic production.

Instead, Brazil is anticipated to assume the leading exporter's role in 2002/03, conditional on achieving the projected production level. Exports from some other origins, such as India, Canada and China, are expected to be lower, a consequence of limited availability and thus more remunerative domestic markets. In conformity with the trend of recent seasons, the dependence on soybean meal is forecast to increase further. Thus, its share of world trade is expected to establish a new record, at about 84 percent, as the trade for many of the others meals continues to be limited by their short supply. The only exception could be sunflower meal as the expected increase in production could lead to a slight expansion in export availabilities.

1. Note on methodology: Almost the entire volume of oilcrops harvested world-wide 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, while the data on trade in and stocks of oils and cakes refer to the sum of trade in and stocks of oils and cakes plus the oil and cake equivalent of oilseed trade and stocks.

2.  Please note that this section discusses expected developments in the production of oils and meals of all origins, which - in addition to products derived from the oilcrops discussed in the previous section - include palm oil, marine oils and meals as well as animal fats.