Chicago, May 10 (OsterDowJones) - The MY 2004/05 copra oilseed productionin the Philippines is forecast at 2.4 million metric tons, according toinformation from the U.S. Department of Agriculture's Foreign AgriculturalService web site, dated May 5 and released Monday.

Executive SummaryCoconut trees have recovered from the stress brought about by twoconsecutive years of heavy nut-bearing (CY2000 and CY2001), and copraproduction in MY03/04 will exceed the previous year's output. Copraproduction through MY04/05 will continue to increase compared to theMY03/04 level, and crush consumption will correspondingly increase duringthe period. Copra meal and coconut oil (CNO) output during the period areexpected to increase.Adequate copra meal and CNO supply and high vegetable oil prices inMY03/04, are expected to enhance increased local consumption of bothproducts during the year. Copra meal and CNO consumption are likely tocontinueincreasing in MY04/05 due to the projected improvement of the Philippineeconomy and the rapidly expanding Philippine population (2.36 annualgrowth rate).Copra meal exports are projected to remain flat through MY04/05 as theEU, based on stricter standards set by the Codex Alimentarius Commission,imposed trade restrictions on Philippine copra meal exports last year.Copra mealexports would have declined further during the period had it not been forincreased purchases by other buyers outside the EU. The GRP is expected topursue talks with the EU to resolve this issue.CNO exports in MY03/04, on the other hand, are projected to declinefrom the MY02/03 level as CNO exports to the EU are also expected to facetrade restrictions as a result of food safety concerns, the report said.Exports,however, are predicted to recover and increase in MY04/05 as a result ofthe country's inclusion in the EU's Generalized System of Preferences aswell as the potential for CNO exports to China.Despite an aggressive soybean production plan, soybean output isexpected to remain stagnant through 2005. Soybean crush, therefore, willstill utilize imported beans. High bean prices and the renewed weakness ofthe Peso in 2004, will likely result in the decline of soybean importsthis year from the 2003 level although soybean crush during the year isexpected to increase due to strong feed demand. Soybean imports andconsequently soybean crush in 2005 are likely to grow from 2004 as globalbean supplies normalize.Soybean meal (SBM) and soybean oil production in 2004, therefore, areexpected to increase through 2005 from the 2003 level.The Philippine feed milling industry will continue growing through2005 as the local livestock, poultry and aquaculture industries continueto expand. The decline in SBM imports in 2004 from the previous year'slevel will be compensated for by a modest increase in SBM production,making possible higher SBM consumption during the year. Consumption in2005 will likely surpass its 2004 level as SBM imports are expected tosurge as the shift in consumption away from animal proteins to vegetableoil meals accelerates. The shift, which started in 2003, will result inflat fishmeal production through 2005 as well as contraction in fishmealimports and consumption during the period.

Production, OilseedCopra production in MY02/03 was adjusted upwards to 2.3 MMT from 2.2MMT the previous year as coconut trees began recovering from the stressbrought about by two consecutive years of heavy nut-bearing (CY2000 andCY2001). Post expects Philippine coconut production to further increase inMY03/04. On a calendar year basis, both the Philippine Coconut Authority(PCA) and the United Coconut Associations of the Philippines, Inc. (UCAP)estimate coconut output in 2004 to reach around 2.4 MMT. Post's estimatefor MY03/04 is lower because, unlike the PCA's or the UCAP's forecast,Post does not take into account other coconut products such as desiccatedcoconuts or foodnuts consumed directly for food, the report said. Copraproduction the following year (MY04/05) is likely to continue increasing.Copra quality problems, however have surfaced as major buyers of coprameal have complained of the high aflatoxin content of exported Philippinecopra meal. Aflatoxin levels rise due to improper drying of copra and isclaimed to be carcinogenic. Most coconut farmers still practice crudecopra-drying methods such as sun drying and leaving split coconuts exposedto the environment instead of being dried immediately. Because of this,the Department of Agriculture (DA) plans to pursue a national copraquality improvement program. Implementation, however, is constrained bybudgetary limitations.Local soybean production has stagnated, and output is expected toremain flat at 100,000 tons through MY04/05. However, efforts by theprivate sector to revive the industry are reportedly underway, the reportsaid. Late last year, San Miguel Corporation (SMC), the country's largestfood and beverage company, announced plans to establish a 500,000 hectaresoybean-growing program on several agro-industry zones nationwide.Each zone will have 50,000 hectares of which 20,000 hectares will beallocated to soybean production, 20,000 for corn, and 10,000 for cassava.SMC has 37 feed mills throughout the country and according to mediareports, plans to buy the soybeans at a fixed price of P11 ($0.20) perkilogram. The DA is assisting SMC in the soybean-growing program at theseed production stage.Because of SMC's initiative, the DA has expressed optimism that thePhilippines can be self-sufficient in soybeans in the next two years,after initial yield results in selected areas showed an average yield of2.7 tons per hectare. Industry contacts, however, believe it will takelonger to achieve self-sufficiency, if ever. The original target forcommercial production was earlier set for October 2004 but delays in seedproduction will likely extend commercial planting to 2005 or beyond. Landavailability likewise is expected to be a limiting factor.

Consumption, OilseedsTraditionally, national copra crush capacity is about double overallcopra supply. Copra crush in MY02/03 was raised due to thehigher-than-expected copra production during the year. Copra crush inMY03/04, however, was pared down slightly to 2.26 MMT, due to trademeasures imposed by the EU on copra meal exports. Copra crush during theyear, however, will still be higher than its MY02/03 level. For MY04/05,copra crush will further increase from its MY03/04 level to 2.4 MMT ascoconut production is expected to continue expanding.For soybeans, three major crushers, namely; Hui-Shing Philippine Corp.(HSPC), Universal Robina Corp. (URC) and General Milling Corp. (GMC),account for around a 1,700 MT daily crushing capacity on an 8-hour shiftbasis. This translates to about a 400,000 MT soybean requirement on anannual 230-day single shift operation basis.Total domestic consumption was revised upwards in 2003 due tohigher-than-expected supply and is expected to increase to 2.4 MMT through2005 mainly due to strong feed demand by the local livestock, poultry andaquacultureindustries. Positive economic prospects in 2005 coupled with a growingpopulation will translate into increased meat consumption, and thereforefeed demand, during the period.

Trade, OilseedsPost uses trade data from the UCAP and the National Statistics Office(NSO). According to the NSO, last year, export sales of coconut products,the country's top agricultural export, rose 34% to $641 million from $478million in 2002. Exports of coconut products comprise nearly half of totalagro-based exports. Trade data from the NSO, however, are often revisedcasting doubts about its accuracy. A small amount of copra was imported inMY02/03 from Indonesia according to the NSO. Post utilizes UCAP exportdata for coconut products. No copra exports are expected through MY04/05.Appropriate adjustments have been made for soybean imports, consistentwith data from the NSO. Bean imports last year were higher than expectedwhile U.S. imports were pared down slightly. In 2003, the U.S. marketshare of total soybean imports was 49%, a decline from the market share ofprevious years. Beans from Argentina, the second largest supplier, on theother hand, had a 47% market share, up from its 20% in the previous year.Total soybean imports in 2004 are likely to decline compared to the2003 level due to high global prices compounded by the renewed weakness ofthe Peso. Overall bean imports are expected to increase in 2005, however,as the global supply situation improves. U.S. bean exports to thePhilippines are likewise expected to increase although competition fromArgentina and Brazil are expected to persist during the period.For this year, copra imports are levied a 10% MFN tariff, unchangedfrom the previous year's level. Soybeans are subject to a 1% MFN duty, thesame rate as last year. The Common Effective Preferential Tariff (CEPT)rates under the ASEAN Free Trade Agreement (AFTA), are, in general terms,lower than the MFN rates. Copra imports from ASEAN member countriesenjoying tariff concessions under AFTA are levied a 5% CEPT duty in 2004and 2005. Imports of soybeans under the AFTA come in duty-free during bothyears.

Policy, OilseedsThe GRP's budgetary limitations will dampen prospects for increasedcopra production in the long term. In July 2003, the PCA, after providingwilling growers free coconut seedlings and seednuts for more than twodecades, started selling them to maintain its nursery operations andminimize operating losses.The PCA is also exerting efforts to develop value-added coconutproducts for the export market. One such product is geotextiles orsynthetic permeable textile materials used with soil or rock foranti-desertification and soil erosion applications. The PCA is trying tosecure a $100-million soft loan for the development of around 400,000hectares of coconut lands to commercially produce geotextiles, coco-peatand other high-value coconut products.Other coconut products being developed and promoted include virgincoconut oil (VCNO) and coconut methyl esters (CME).

Production, OilmealsCopra meal production in MY02/03 was slightly raised to 743,000 MT dueto upward adjustments made to copra crush during the period and willlikely continue increasing through MY04/05 to 770,000 MT as copra outputincreases.Tight global supplies of vegetable oils are expected to enhance higher CNOproduction in the next two years, the report said.Soybean meal (SBM) production in 2003, on the other hand, was alsoadjusted upwards to 210,000 MT consistent with revisions made to soybeancrush during the year. Production through 2005 is expected to continueincreasing to 213,000 MT due to strong demand by the domestic livestock,poultry and aquaculture industries.Fishmeal production will likely remain flat at 11,000 MT compared toits 2003 level as demand is expected to wane through 2005. Animal and foodsafety issues surrounding animal proteins have been highlighted by theoutbreaks of animal diseases in recent years, and feed nutritionists arenow shifting more to vegetable oilmeals for their protein requirementsrather than from animal sources.

Consumption, OilmealsFeed demand continues to grow in the Philippines with the local hogindustry continuing its steady growth. The poultry industry, on the otherhand, while also growing, is still hampered by radical productionextremes. Occurrences of poultry oversupply and shortages are notuncommon. A fast-emerging feed-consuming sector, which is expected to growfurther, is the domestic aquaculture industry. Recent outbreaks oflivestock and poultry diseases have caused some shift away fromtraditional meats to fish. According to the Bureau of AgriculturalStatistics (BAS), the local swine and poultry industries last yearexpanded by 3.98% and 1.3%, respectively, while the domestic aquacultureindustry grew by an impressive 8.69%. Aquaculture production in 2003 wasthe second fastest growing sector of Philippine agriculture.Anchored on these growing industries is the Philippine feed millingsector. In 2003, the overall daily rated capacity of registered Philippinefeed mills was estimated at 22,000 MT per 8-hour shift. This translates toan annual production capacity of around 4.7 MMT of feeds.Total feed production in 2003, however, is estimated to be in thevicinity of 3.0 MMT. The gap in capacity against actual feed producedleaves plenty ofroom for expansion and more feed grain imports. Thedomestic feed industry is estimated to grow 3%-5% annually through 2005,according to industry sources.Overall domestic copra meal consumption will increase modestly throughMY04/05 to 320,000 MT. Copra meal is used in preparing animal feeds,particularly for cattle, including lactating cows as it is said to aid inmilk production. Copra meal consumption figures during the three-yearperiod were adjusted upwards, and appear to be very large as it takes intoaccount spoilage and waste. Trade restrictions on Philippine copra meal bythe EU, as a result of high aflatoxin content, will likely result in asignificant increase in stock levels which are then vulnerable tospoilage.SBM consumption in 2003 was raised 1.5 MMT as a result ofhigher-than-expected supply due to higher production and imports. SBMdemand will increase through 2005 to 1.6 MMT as the domesticfeed-consuming sectors continue to expand. These sectors recognize U.S.soybean meal as a premium feed ingredient known for its nutrient contentand value. The growing food needs of the rapidly growing Philippinepopulation and the positive economic projections for 2004 and 2005 arelikely to enhance increased SBM consumption.While dramatic, the growth of the local aquaculture industry did nottranslate into higher fishmeal consumption in 2003. On the contrary,fishmeal consumption had to be revised downwards to 47,000 MT from anearly estimate of 96,000 MT. According to industry contacts, becausefishmeal is costlier than vegetable oilmeals, animal nutritionists havestarted to blend SBM with corn gluten meal to substitute for fishmeal.As mentioned earlier, the recent microbial contamination issuessurrounding animal proteins and the outbreaks of several animal diseases,such as the BSE, have resulted in this blending practice. This shift tovegetable oilmeals away from animal proteins will likely continue through2005 and displace a percentage of fishmeal demand. Fishmeal consumption isexpected to decline through 2005 to 46,000 MT because of this.

Trade, OilmealsCopra meal exports in MY02/03 were revised downwards to 450,000 MTbased on data from the UCAP, and is the result of increased traderestrictions imposed on copra meal by the EU. Last year, the EU reducedthe maximum limiton aflatoxin content in copra meal from 200 parts per billion (ppb) to 20ppb. This ruling disallowed Philippine copra meal exports to the EU. TheEU regulation is based on concerns that if the contaminated copra meal isused as a feed ingredient for dairy animals, the aflatoxin carcinogencould be transmitted to infant milk.Europe is a traditional market for Philippine copra meal and pays apremium for the product. Other markets include Vietnam, Korea and NewZealand. Overall Philippine MY02/03 copra meal exports would have beenmuch lower had it not been for an increase in imports by Japan and Korea.The trade restrictions will likely result in flat copra meal exportsthrough MY04/05 (450,000 MT) although the GRP will pursue negotiationswith the EU to soften the impact of the trade constraint.SBM meal imports, on the other hand, were adjusted upwards in 2002/03to 1.25 MMT based on NSO data. Despite possible duty-free imports of SBM,imports in 2003/04 are expected to decline slightly to 1.2 MMT from the2003 level due to high soybean prices and the renewed weakness of thePeso.SBM imports in 2004/05, however, will likely recover to 1.4 MMT, andthe U.S. market share is expected to improve to 450,000 MT from the 2003level of 300,000 MT.For fishmeal, imports in 2003 were revised downwards consistent withdata from the NSO. The decline marked the start of the shift away fromanimal protein meals to vegetable oil meals by the domestic aquafeedmanufacturers due to reasons stated in the OILMEALS, Consumption Section.Peru was the top fish meal supplier to the Philippines in 2003 with a 42%market share followed by the United States with a 31% share of the market.Fishmeal imports are expected to decline through 2005 compared to the 2003level as the practice becomes more widespread.Soybean meal MFN tariffs will be set at 3% in 2005, unchanged from the2004 level. CEPT duties, on the other hand, will be at zero for both yearsexcept for those originating from Cambodia, which do not enjoy any tariffconcessions. The same MFN and CEPT rates (3% and duty-free rate,respectively) apply to copra meal in 2004 and 2005. MFN duties forfishmeal imports will be set at 1 percent through 2005 while CEPT ratesare duty free for the same period, except for those originating from Burmaand Cambodia.

Policy, OilmealsIn response to escalating prices of pork and poultry meat in late2003, President GloriaMacapagal Arroyo signed Executive Orders 299 (EO299) and 300 (EO 300) allowing the importation of 10,000 metric tons (MT)of pork at 10% tariff and the duty-free importation of soybean meal forsix months, respectively. EO 299 was signed on March 26, 2004, while EO300 was signed on March 29 this year. EO 300 took effect May 2, 2004.

Production, OilsAs mentioned in the OILSEED, Consumption section, total national crushcapacity is roughly twice the traditional copra supply. Nationwide, thereare approximately 71 copra crush facilities that extract crude CNO fromcopra. A portion of the extracted crude CNO is further processed into themore refined CNO. Some of these crush facilities also function asrefineries. The majority of both types of plants are located in thesouthern portion of the main island of Luzon. Philippine CNO production isexpected to increase through MY04/05 to 1.5 MMT due to the expected strongdemand for CNO in light of tight global vegoil supplies.However, like copra meal, CNO quality standard issues, specificallythose concerning the polycyclic aromatic hydrocarbon (PaH) content of CNO,may affect production and consequently threaten CNO trade (seeOILS,Trade). PaH is a contamination from smoke due to incomplete fuelcombustion during kiln-drying. It is considered a carcinogenic organiccompound.Soybean oil production in 2003 was slightly raised to 46,000 MT due tosimilar adjustments made to soybean crush. Production in 2004 will likelyincrease to 47,000 MT as imports initially decline, recovering in 2005 asglobal soybean supply normalizes and prices stabilize.

Consumption, OilsLast year, the National Economic and Development Authority (NEDA)reported that Philippine GNP grew 5.5% from the previous year's level,buoyed by strong dollar remittances from overseas Filipino workers (OFWs).GDP, on the other hand, expanded by 4.5% last year from 2002, fallingwithin the government's official forecast of 4.2%-5.2%. In 2003, theagriculture sector recorded a 3.77% growth rate.NEDA expects the domestic economy this year to grow 4.9% to 5.8%. Theprojected economic performance is expected to be driven by electronics andagricultural exports, as well as strong personal consumption. NEDA alsoprojects inflation at 4%-5%, an exchange rate of P54-P56 against thedollar and a 10% growth in overall exports.Local consumption of CNO in MY03/04 is expected to increase to 296,000MT from the MY02/03 level of 284,000 MT as a result of the expectedpositive growth in the economy. The majority of locally-consumed CNO isused as cooking oil, and the growing food needs of the rapidly expandingPhilippine population support increased domestic consumption of CNO.High prices of soybean oil and palm oil are also likely to enhancemore domestic use of CNO. CNO is also used as a material in themanufacture of margarine, shortening, soaps, oleochemicals for detergent,etc. Increasing CNOconsumption is expected to extend to MY04/05 to 310,000 MT, in line withthe projections for continued economic growth, the report said.Consumption of soybean oil in 2003 was slightly raised to 60,000 MTdue to higher-than-expected supply but will likely decline in 2004 to57,000 MT as a result of high soybean and palm oil prices.Soybean oil consumption will grow marginally the following year to63,000 MT as prices stabilize and the Philippine economy further improvesin 2005.

Trade, OilsPhilippine CNO is the consistent top agro-based product exported bythe country. According to preliminary data from the NSO, total CNO exportsin 2003 were valued at $505 million, 80% of which came from crude CNOexport sales. The EU was the Philippines' largest market for crude CNOlast year, followed by the United States, Malaysia and China.For refined CNO, the majority of exports went to the United States,followed by Japan, the Netherlands and Malaysia. On a market-year basis,CNO exports in MY02/03 were raised slightly based on UCAP data. The EU andthe United States were the top two destinations during the period withmarket shares of 42% and 31%, respectively.The Codex Alimentarius Commission (CAC) reportedly is ready to imposenew standards on CNO this year that will dampen CNO exports in MY03/04.The CAC is expected to cut the maximum allowable PaH level in response tothe EU's request for CAC to establish the appropriate CNO standards. ThePaH level of CNO is around 47 ppb while other vegetable oils range fromonly 2 ppb to 12 ppb. Tight global supplies of soybean and palm oil,coupled with the reported dwindling CNO stocks in Europe, however, willlikely result in the delay in implementation of the new standards. Thisseems to be supported by the recent inclusion of the Philippines under thelist of countries under the EU'sGeneralized System of Preferences (GSP) which makes Philippine CNO subjectto lower tariffs (see OILS, Policy). This, plus China's reported interestin augmenting its edible oil supply with Philippine CNO will likely resultin increased CNO exports through MY04/05.Soybean oil imports in 2003, on the other hand, were slightly raisedbut expected to decline in 2004 due to weakening demand and adequate CNOsupply. Imports, however, are expected to recover and increase slightlythe following year as the global supply improves and the Philippineeconomy expands.MFN Tariffs on CNO in 2005 remain unchanged from the previous year'slevel at 10% while CEPT duties have been established at 5% in 2005, upfrom 3% the year before. The CEPT rates, however, do not apply to CNOimports from Cambodia. Soybean oil, on the other hand, is levied a 7% MFNduty in 2004 and 2005 but under the AFTA, a 3% tariff will be applicableduring both years.

Policy, OilsUnder the EU's GSP, starting January 2005, the Philippines will beallowed to export crude CNO to the EU duty-free. In addition, thePhilippines will be able to export refined coconut oil to the EU at areduced tariff rate of 6.1%, 3.5 percentage points lower than the 9.6%tariff it imposes on vegetable oilsuppliers under the MFN scheme.On Feb. 9, 2004, President Gloria Macapagal-Arroyo signed MemorandumCircular No. 55 (MC 55) directing all GRP departments, bureaus, officesand instrumentalities of the government to incorporate the use of onepercent by volume, coconut methyl ester (CME) in their dieselrequirements. MC 55 aims to create a new market for coconut farmers and atthe same time promote the GRP's desire for cleaner air. The lead agencytasked to implement the CME program is the Department of Energy (DOE).Republic Act 8976 (RA 8976) or the Philippine Food Fortification Lawof 2000, requires that all staple foods - rice, sugar, flour, salt andcooking oil - be fortified with Vitamin A, iron or iodine. RA 8976 is tobe fully implemented on Nov. 7, 2005. The law applies to all manufacturersor producers, importers, traders, tollees, retailers, repackers of staplefoods, as well as restaurants and food service establishments where suchfortified food products are likely to be served. Post believes thesesectors are not yet equipped with the adequate technology andinfrastructure to implement the lawand expect that the implementation date of RA 8976 may be deferred.A new coconut product being promoted, and for which demand in theforeign and local markets is increasing, is virgin coconut oil (VCNO). Itis said to be renowned for its health and medicinal benefits. Premiumgrade VCNO is oil derived from first press of fresh, choice and maturecoconut meat. It does not undergo any heat treatment, unlike conventionalCNO. Because of this, it is claimed that all the vitamins, nutrients,anti-oxidants, and other substancesbeneficial to human health, are not dissipated with heat.

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