7/1/05 OIL WORLDOilseeds

World soybean supplies are bearish and world stocks of soybeans and of alloilseeds will rise unusually sharply during 2004/05. This is alreadylargely discounted in the prices. We still see some additional downwardpotential for prices of soybeans and also for rapeseed and sunflowerseedin coming months. But there are some uncertainties to watch:

1) Weather conditions in South America. Some concern is linked to cropstress caused by too dry conditions in Rio Grande do Sul (Brazil) and inthe Buenos Aires province (Argentina). If it remains too dry and hotirreversible crop damage will occur.2) The soybean rust fungus has spread on a considerably wider area inSouth America than in the preceding two years. It has been detected veryearly in the season in several regions. This has alerted the agriculturalcommunity as well as the industry as the soybean rust implies the risk ofconsiderable production losses, unless properly treated. This requiresimmediate action once the fungus is detected. Big uncertainties remain,partly because the disease is a new phenomenon for farmers.3) On January 12 the USDA will publish its Dec 1 soybean stocks in allpositions report as well as its final 2004 soybean crop number. There isthe likelihood of a downward revision from the previous crop estimate.4) Farmer selling has been very reserved so far in the US and SouthAmerica. Due to the current low prices and the risk of damage from therust fungus in 2005, farmers are in no rush to market their crops. But thepace of selling will have a major impact on prices.5) Demand developments in China, Europe and other countries will beanother important variable to watch. Chinese oil and meal consumption haspicked up since about mid-2004 and this has led to sharply higher importsof soybeans, palm oil and fish meal. Chinese soya oil imports wereartificially curbed by government regulations early this season. This hasresulted in a decline in Chinese soya oil stocks below the year-ago level,which has created pent-up demand and will lead to higher Chinese purchasesand imports in the near term. As of end-Dec 2004 soya meal stocks were atrecord levels in Argentina and Brazil. In the 5 major countries stockswere approximately 0.4 Mn T above the year-ago level.

Vegetable Oils

So far this season world demand for vegetable oils has been relativelybetter than for oilmeals. Oilmeals have a very important competitor --namely feed grains -- and their relatively more attractive prices havecurbed oilmeal demand so far this season. In contrast, oils & fats arerather autonomous and have virtually no substitutes. And most recently,additional demand has been created by the pronounced expansion ofbiodiesel production in Europe and otherm countries. This is an importantnew demand factor which alone will show an increase by at least 1.0 Mn Tin Oct/Sept 2004/05. Global soya oil imports increased in December andwill also be up from last year again in January 2005.Combined soya oil exports of Argentina, Brazil and the USA (the G-3countries) increased sharply from a year earlier by 26% in Nov and by 30%in Dec (following a decline in Sept and Oct 2004).

Total G-3 soya oil exports reached an estimated 2.085 Mn T in Oct/Dec2004, up by 6% from one year and by 22% from two years earlier, mainly dueto higher exports to India, North Africa and some other countries.

World stocks of soya oil did not show the usual seasonal increase from Oct1 until end-Dec 2004. Stocks of the USA, Argentina and Brazil (G-3) evendeclined to a multi-year low of only 1.1 Mn T as of end-Dec 2004, down byalmost 0.4 Mn T from a year and by even 0.7 Mn T from two years earlier.

World supplies of soybeans would be sufficient to increase soybeancrushings more sharply. But the lack of oilmeal demand and the alreadyburdensome oilmeal stocks have recently curbed global soybean crushings.The solution for this dilemma will be a further decline in oilmeal pricesduring Jan/June to stimulate consumption. As soybean crush margins arequite poor at the moment, seed oils will have to finance a growing shareof the crush value. This requires a strengthening of seed oil pricesrelative to oilmeals in coming months.

The prospective slowing-down of the growth in world palm oil output willrequire that a larger portion of world demand is covered by seed oils. Atthe moment the large Malaysian palm oil stocks keep the bearish sentimentin the near term. But the year-on-year increase in Malaysian palm oilsupplies will dwindle in April/June and July/Sept 2005. This will furthercomplicate the imbalance between the oil and oilmeal supply & demandfundamentals.

Our conclusion is that we are bullish on the oil share and bearish onoilmeal prices for Jan/June 2005.