21/12/05 (World Commodity Profiles)

Supply-side issues

The Brazilian government is concerned about the expected reduction in soybean area, as soybean and products are the major agricultural export earner. Current levels of producer support are low by international standards. It is highly likely that the government will take action to encourage farmers to resume the upward trend in soybean production that is associated with Brazil. Further investments in infrastructure and changes in the credit and tax policies are the most likely candidates for action.

Recently, it has been suggested that India should turn more to imports of oilseeds to process locally rather than rely on imports of oils. More investment in palm oil production may also take place, although given the time needed for trees to reach full yield potential, its impact would not be seen for some time. Palm oil production should expand in 2005/06 but it is likely that the yield cycle will turn down some time in 2006. This, along with efforts to increase palm oil use for energy (a high priority of the Malaysian government), may cause a sudden downturn in palm oil stocks.

Demand-side issues

Prospects for growth in demand for vegetable oils in general depend on continuation of global economic growth and on US dollar weakness against the currencies of the EU, China and India. Prospects in the Chinese market for consumption of oils, meals and oilseeds remain good. A growing middle class with more disposable income to spend on meats, oils, fish, and dairy products contributes to a positive outlook. International trade in the oilseeds sector is increasingly dependent on continued growth in Chinese imports. Any slackening of demand growth would have negative repercussions for oilseeds.

The strong growth in biodiesel demand for rapeseed oil in the EU25 is expected to continue. FEDIOL (the European oilseed crushers association) suggests that production could exceed 4m t/y by mid-2006 owing to efforts to promote cleaner fuels. A target of 5.75% of transport fuel consumption from renewable sources underpins this growth. This volume of biodiesel is unlikely to be produced from EU-grown rapeseed, opening up the possibility of imports of either raw material or biodiesel. Other countries appear now to be taking note of the success of the EU renewable energy policy, which should encourage growth in energy demand for vegetable oils. Continuing high petroleum prices is necessary to sustain this interest.

India will remain heavily reliant on vegetable oil imports, although the volume of imports will reflect local production of oils, especially rapeseed and groundnut oil. Per head consumption levels have changed little over the last five years and the government is looking for ways of increasing vegetable oil availability without incurring the high costs of imports. Soybean meal demand looks vulnerable to competition from other ingredients. Furthermore, there appears to be an increasing number of reports of avian flu from around the world. Any significant outbreak of avian flu in poultry could have an impact on soybean meal demand.

Stocks and prices

Adverse weather is the main cause of volatility in vegetable oil prices; 2004/05 witnessed some high yields in important oilseed-growing areas. Stock levels held at the end of 2004/05 looked comfortable but adverse weather can easily turn a surplus into deficit, with a consequent impact on prices. Substantial stocks have been accumulated in 2004/05 following bumper crops. Unless this is rapidly disposed of, and as long as production continues to outpace consumption, the resulting market surplus will continue to weigh on prices for some time.