OILSEEDS, OILS AND OILMEALS²

PRICES3

Prices to remain firm in the oilseed complex

During the second half of the 2005/06 season (October-September), prices in the oilseed complex moved upward in response to forecasts of only modest growth in 2006/07 oilcrop production combined with a rise in demand to new record levels. The market reacted to the prospect of less ample supplies and reduced inventories compared with the three preceding years, when supplies were abundant relative to demand. In the last quarter of 2005/06, the FAO price indices for oils/fats and meals/cakes were respectively 10 and 30 percent above the levels recorded during the same period of the previous season. The rise was more pronounced for meal/cake prices which have also come under the influence of strongly rising world prices of wheat and feed grains.

The latest forecasts for 2006/07 confirm that production of oilseeds may not be sufficient to satisfy global demand for oils/fats, thus necessitating a sizeable reduction in stocks. Such an outlook suggests that prices for oils/fats may continue rising during the current season. By contrast, the increase in prices for meals/cakes could come to a halt as global output of meals is currently anticipated to exceed demand, causing inventories to rise further. However, the price depressing effect of large stocks could be offset by continued strength in feed grain prices, which, eventually should stimulate oilmeal demand. The futures market tends to point into this direction: by late November 2006, the CBOT March contract for soybeans was about US$50 per tonne (or 23 percent) higher than the corresponding value of 2005 and, since September 2006, the development of soybean futures prices has been strongly influenced by maize futures.

Over the next few months, prices in the oilseed complex will be affected by the progress of the southern hemisphere crop, which will be harvested early in 2007. Later in the season, prices will increasingly reflect 2007/08 production prospects for oilseeds as well as other crops. The latest indications of continued tightness in the feed grain markets have the potential to affect oilseed plantings in 2007. If the currently anticipated fall in the oilseeds/grains price ratio materializes (see Figure 8 in the coarse grain section, which compares soybean and maize futures prices) farmers in the northern hemisphere can be expected to sow more grains and less oilseeds in the spring of 2007, which would lend further support to the prices of oilseeds and derived products over the year

 

 

Table 5. World oilseeds and products markets at a glance

Growth in world oilseed production to slow down

Global 2006/07 oilseed production is currently forecast to increase by less than one percent, a considerable slow-down compared with past seasons. World soybean output is anticipated to expand by 2-3 percent, reaching a new record, but this is expected to be offset by declining world production of rape, groundnut and sunflower seed.

Regarding soybeans, a record crop has been harvested in the United States, thanks to a rise in both area and yield. In South America, where soybean plantings are still underway, production is tentatively forecast to grow at a below average rate of 2 percent. Brazil’s output is forecast to fall by about 2 percent, owing to a sizeable reduction in plantings, for the second consecutive year, caused by high production costs and lack of funding. Brazil’s shortfall should be offset by Argentina, where soybean plantings are expected to exceed the 2005/06 record level, leading to an output projection of 42 million tonnes, exactly double the amount produced in 2000. In China, the world’s fourth largest producer of soybeans, output is reported to have fallen for the second consecutive year. World rapeseed output is forecast to decline sizeably after three years of record breaking crops, mainly because unfavourable weather conditions have lead to a drop in yields. Lower production is expected in four out of the five major producers, namely Australia, Canada, China and India. In India, production fell because farmers preferred to shift some land to grains and pulses, which were more attractively priced. European Unionrapeseed output is estimated to have remained unchanged, whereas production has expanded in Ukraine. Also world groundnut production has fallen after three years of good performance. Lower output has been reported from India and the United States. With regard to sunflower seed, the drop in production in the United States has only partly been offset by rises elsewhere.

Table 6. World production of major oilseeds

OILS AND FATS4

Weakening growth in global supplies

Current crop forecasts translate into a below average increase of global oils/fats production of around 2 percent. The slowdown comes from an only modest increase in soybean oil production and falling rapeseed, groundnut and sunflower oil output. By contrast, global palm oil production is expected to again rise markedly in 2007. The projected 7 percent increase in output is due to a further significant rise in the mature area, notably in Indonesia. However, these forecasts remain tentative as palm oil production could be negatively affected by El Niño conditions. Global supplies of oils/fats (i.e. 2005/06 ending stocks plus 2006/07 production) are forecast to augment further, though they should rise markedly less than during the last two seasons.

Sustained expansion in demand

As in past years, global demand for oils/fats, both for food and non-food purposes, is anticipated to expand significantly: during 2006/07, world consumption is expected to increase by almost 6 million tonnes or 4 percent. An increasingly important demand factor is the fast growing use of oils/fats as fuels and as feedstock for biodiesel production. Such utilization is expected to expand further in the European Unionand the United States, while production is starting in various other countries, including Argentina, Brazil, Canada, Indonesia, Malaysia and the Philippines. The key oils concerned are soy and rapeseed oil, but palm and coconut oil as well as animal fats are also being used. Private sector investment into the development of biodiesel industries continues to be strong, irrespective of the uncertain development of mineral oil prices and notwithstanding the possibility that plants may not be running at full capacity. Government incentives and other public support measures, together with existing or prospected mandatory blending requirements explain this trend. According to private sources, global utilization of oils/fats as biofuels should exceed 10 percent of total consumption in 2006/07.

As to total consumption of oils/fats, the anticipated reduction of rapeseed, groundnut and sunflower oil supplies should increase the reliance on soy and palm oil in 2006/07. Together the two oils should account for half of total consumption. Traditionally, the bulk of the expansion in global demand occurs in the developing world. However, in the last two years, sizeable growth has also occurred among developed nations due to biofuel production in these countries, a trend that is expected to continue in 2006/07. Among developing countries, demand expansion is expected to be led by Asia. Particularly noteworthy are China, where population and GDP growth continue to spur food and non-food consumption, and Malaysia, with rising demand for palm oil for use as fuel and biodiesel feedstock.

Tightening supplies calling for a reduction in stocks

Compared with overall demand, global supplies of oils/fats continue to be ample, thanks to the availability of large stocks. However, 2006/07 production per se would not be sufficient to meet demand, therefore necessitating a reduction in global inventories of about 3 percent. This development reverses the trend observed in the last two seasons, when global oils/fats production was in excess of demand, causing oils/fats stocks to surge to record levels. The projected reduction in inventories should mainly concern rape and sun oil, and be concentrated in China, India , the European Unionand North America. Current forecasts for 2006/07 imply a reduction in the global stock-to-utilization ratio by one full percentage point, thus explaining why oil/fat prices are anticipated to remain high or even strengthen further during the course of this season. Early projections for next season, which point towards a further tightening of the supply and demand situation in 2008, could lend additional support to prices.

 

Trade to increase markedly

Similar to the past few years, world trade in oils/fats (including the oil contained in seeds traded) is anticipated to rise by over 6 percent or more than 4 million tonnes in 2006/07. Palm oil and soy oil should account for most of the expansion due to this season’s reduced supplies of rapeseed and other oils. The bulk of the increase in imports is expected to originate from developing countries, especially in Asia. China and India continue to be key buyers, with import volumes (including the oil contained in oilseeds imported) forecast at a record level of 14.1 million tonnes and 5.8 million tonnes respectively. The anticipated 10 percent rise in China’s imports is a result of poor rape and soybean crops, as well as rising domestic demand for oilseeds, which is being stimulated by continued expansion in the country’s crush capacity. Also in India, where last season’s abundant crops lead to a halt in import expansion, this season’s prospective fall in output is expected to result in record import volumes. The European Unionshould account for most of the increase in import demand in developed countries. After two years of exceptional expansion, imports are expected to continue growing strongly because domestic oilseed production is not sufficient to satisfy both, demand for food uses and for biofuel production. Further growth in import demand is also expected for the United States.

As to global exports of oils/fats, in several countries - notably Argentina, Brazil, Canada, Indonesia, Malaysia ,and the United States, export availabilities are expected to be constrained by increased use of oils/fats as biofuels domestically. Brazil could actually experience a fall in shipments, given the likely reduction in output. Similarly, Australia should have less rapeseed oil for export, following the drop in domestic output. In view of these shortages, Canada is expected to further raise its exports of rapeseed and rapeseed oil, shipping a record 3.4 million tonnes in 2006/07. In addition, Ukraine is anticipated to step in as a new supplier of rapeseed. Argentina and the United States should supply most of this season’s increase in soy oil trade. The two countries’ record soybean harvests should allow them to ship record amounts. In the case of Argentina, this would also apply to sunflower oil. The largest expansion in shipments is expected to occur in palm and palm kernel oil. Together, the two oils should account for well over 40 percent of total trade in 2006/07, with Indonesia and Malaysia as dominant suppliers. While Malaysia is expected to remain the largest exporter, Indonesia’s shipments are quickly approaching the levels anticipated for Malaysia.

MEALS AND CAKES5

Continued rise in supplies thanks to record carry-in stocks

Global production of meals/cakes is expected to rise only modestly in 2006/07. The anticipated one percent increase implies a below average gain for the second consecutive year. Growth is dampened by reduced production of rape, sunflower and groundnut meal, which, however, should be compensated by a record output of soybean meal. The rise in soybean meal production will be on account of Argentina and the United States. The expansion of output in these two countries is expected to offset the decline expected in Brazil, China and India. Looking at global supplies of meals/cakes (i.e. adding 2005/06 ending stocks to 2006/07 production), an average growth of 3-4 percent is expected for the current season, thanks to the availability of record carry-in stocks.

Sustained growth in demand

In 2006/07, world consumption of meals/cakes is anticipated to grow by 3-4 percent or 3.3 million tonnes (expressed in protein equivalent), stimulated, inter alia, by a tight outlook and rising prices for feed grains as well as the anticipated recovery in livestock production. Soybean meal is expected to account for as much as 90 percent of the anticipated rise in meal/cake consumption. Three-quarters of the demand increase should originate in developing countries, where consumption is seen to be expanding much faster than in developed countries. As in previous years, consumption growth will be concentrated in Asia, with the highest increase, in absolute terms, expected in China. About half of the projected increase in global demand is anticipated to occur in China which, if materialized, would lift the country’s share in global utilization to more than 20 percent. Among developed countries, consumption is expected to remain about unchanged in the United States, whereas, in the European Union, it is likely to expand further thanks to the availability of attractively priced meal, which stems from the oil demand-driven increase in domestic crush.

Excess supplies to result in further rising stocks

According to current forecasts, 2006/07 meals/cakes production should, as in the two preceding years, exceed demand, although the size of the surplus should diminish. As a result, inventories are expected to rise for the third consecutive year, setting a new record. The rise would largely be on account of increased soybean meal inventories in the United States, which should offset falling stocks in Brazil and the European Union. Based on current supply and demand forecasts, the global stock-to-utilization ratio for meals/cakes would remain about the same as in the previous season. This picture suggests that the recent upward trends in meal/cake prices could come to a halt. However, this situation might be short-lived given current forecasts of a tightening of supplies vis-à-vis demand in 2007/08, a scenario that would lend renewed support to meal/cake prices later this season.

 

Sustained growth in trade

The expansion of global trade in meals/cakes is anticipated to continue in 2006/07. Shipments should expand by over 6 million tonnes (expressed in product weight), a 5 percent rise compared with last season. Soybean meal is expected to account for virtually all of the expansion in global trade, with only two countries, Argentina and the United States, participating in the increase in exports. Shipments from these two countries should climb to record levels. By contrast, a reduction in export volumes is expected in Brazil and India, owing to poor domestic crops and rising internal demand. Regarding imports, virtually the entire increase in global import demand is expected to originate in developing countries. Import requirements are seen rising in particular in developing nations in Asia. In China, the anticipated fall in domestic meal production combined with rising demand for meals/cakes are expected to push up the volume of imports by a further 3.4 million tonnes (including the meal contained in imported seeds) or 14 percent compared with 2005/06. Sizeable increases are also anticipated in Malaysia, Pakistan, the Republic of Korea, Thailand and Viet Nam. In the European Union, which accounts for about one-third of global import demand, purchases are expected to remain unchanged.

2.  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, while 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.

3.  For details on prices and corresponding indices, see appendix Table A22.

4.  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.

5.  This section refers to both meals derived from oil crops as well as fish meal.