EIU ViewsWire World -- 06/21/04 - There has been an unexpected reductionin demand for soybeans, principally as a result of developments in China.The Chinese government has taken a number of measures to cool the rate ofeconomic growth, with the result that margins for crushers have becomepoor. Consequently, contracts have been cancelled and this has led toreduced expectations of import levels during the remainder of the 2003/04(October-September) season. There has also been some tightening of importregulations, which has acted as a further brake on import volumes. Smallvolumes of imports are expected during the third quarter of 2004, althoughmost observers anticipate that imports will again pick up during the lastquarter of 2004.

Growth in consumption of oilseeds during the whole 2003/04 season is nowestimated at only 2.1%, compared with growth of 4.1% estimated in our lastquarterly report. China accounts for most of the shortfall, butconsumption elsewhere has also been curbed by the very high prices of theearly part of 2004.

Weaker demand for palm oil from both China and India has been reported,while there have been persistent concerns that China may also cancel palmoil import contracts, although there is little evidence to support thisview. Clearly China is limiting imports as much as possible in advance ofits new crop of oil supplies; scope for a resumption of higher levels ofoil depend on the extent to which oil stocks are allowed to run down tominimal levels.

In contrast, India may have more potential for growth. While currentestimates suggest a reduced import level over the 2003/04 season as awhole, they also imply consumption per head below the 2000-02 period. Therecent change in government--the Congress party and its allies won agoverning majority in the May legislative elections--may lead to someliberalisation of import regimes and increase in consumption.

Strong European demand for rapeseed oil (both for food manufacturing andfor biodiesel) has kept prices high ahead of the new crop harvest. Recentincreases in mineral oil prices have provided a boost for biodieseldemand, and high forecast mineral oil prices--the Economist IntelligenceUnit currently forecasts that average mineral oil prices will rise toUS$33.51/barrel in 2004 (from US$28.83/b in 2003), before falling toUS$26/b in 2005--will continue to support the production of biodiesel inthe near future.

Overall, we have reduced our estimate of global oils consumption in2003/04 to take account of the forecast slowdown in Chinese demand. At82.4m tonnes, consumption looks to have grown by only a modest 2.7%,although given high prices, this indicates that underlying demand remainsrobust. For 2004/05 we anticipate that consumption growth of vegetableoils will be at a more typical level of 4%-plus.

European demand for lauric oils has been maintained despite higher prices.Clearly, stock levels in importing countries are at low levels. Currentbuying activity, reflecting a just-in-time approach to the acquisition ofsuch oils, will not pick up in volume terms until prices ease. Ourassessment of global lauric oils consumption during 2003/04 and 2004/05 islittle changed from the levels reported in our last quarterly report.

European demand for soybean meal during 2003/04 has been good, largely asa result of reduced availability of other feedstuffs. Given sharply higheravailability of alternative meals (especially rapeseed) this position isunlikely to continue into 2004/05. Consequently, we expect reducedEuropean consumption during 2004/05, although this will be partiallyoffset by increased consumption in the US, mainly as a result of thecontinuing increase in broiler production following record high prices.

Given measures to curb demand, prospects in China are much less certain.During 2003/04, consumption is expected to rise to 21.8m tonnes, some 8%up on the previous season. However, we are currently expecting lowerconsumption during 2004/05 as other feeds become more readily availableand growth in livestock consumption slows.

The outbreak of avian flu in Asia appears now to be under control andfarmers are rebuilding their flocks. Recent reports suggest an increase insoybean meal imports into the region (with the exception of China),although we anticipate that this recovery will be short-lived.

The Economist Intelligence Unit now estimates that 2003/04 oilseedsproduction will fall to 268.2m tonnes, around 7.4 m tonnes lower thanestimated in our previous quarterly report. Lower expectations of soybeanproduction in Latin America are the principal cause of the reduction. Weforecast that production in 2004/05 will rise to 283.5m tonnes, nearly 6%higher than the 2003/04 total.

The recently harvested soybean crops in Brazil and Argentina failed tolive up to expectations, the result of both unfavourable weather anddisease infestation. Our current estimates put the Brazilian crop at 52.2mtonnes and Argentinean output at 33.2m tonnes. Some local estimates areeven lower. On a combined basis, this is more than 9m tonnes lower thanthe forecast output reported in the previous quarter. As a result of thisshortfall, global output of soybean during the 2003/04 season is nowestimated at 189.9m tonnes, more than 3% lower than production during2002/03.

However, the market is now primarily concerned with prospects for the2004/05 season. Planting conditions in the US have been favourable for the2004/05 crop. In some areas there have been delays to planting progressbecause of rain, but overall planting is still ahead of last year.Furthermore, conditions have been favourable for germination and earlygrowth. At this stage, we expect a further increase in soybean plantedarea in the US which, with a return to normal yields, should produce acrop of around 75.8m tonnes, some 10m tonnes higher than the poor 2003harvest. Of course, weather conditions between now and the harvest in theautumn can lead to substantial variations in the actual output (based onthe worst and best yields of the past five years, a range of possibleoutcomes between 69m tonnes and 83m tonnes is possible).

In China, soybean output in 2004 is also likely to recover from 2003levels (due to the then poor weather conditions), although farmers inIndia will find it difficult to repeat the high yields experienced in2003. The greatest uncertainty surrounds prospects in South America. Thethreat of disease in the 2003/04 crop harvest period has necessitatedhigher crop-protection costs. It is not clear the extent to which this,coupled with the low yields of the 2003/04 crop, will offset the higherprices paid for soybeans compared with the previous season. We tentativelyexpect a small increase in the planted soybean area in Latin America,which with a return to normal yields could equate to an output of at least55m tonnes in Brazil and nearly 40m tonnes in Argentina.

At a global level, our current forecast is for a soybean crop of 204.9mtonnes during 2004/05, nearly 8% higher than the 2003/04 total.

As expected, farmers in Russia and the Ukraine have reduced plantings ofsunflowerseed in order to increase their grain planted area. Reductions of0.7m ha and 0.6m ha respectively are thought likely. However, good weatherconditions have offset the reduction in area, possibly leading to higheryields. At normal yields, the combined output of Russian and Ukraine islikely to be around 7.6m tonnes, compared with actual output of 9m tonnesduring 2003/04. A lower area is also thought likely in EU-25.

During 2004/05, the key variable in the sunflowerseed oil market will beArgentinean output. At present, wheat and soybean appear to offer betterreturns for farmers and a reduction in sunflowerseed area is thusconsidered likely. The current outlook is for production of 3.2m-3.3mtonnes, little changed from 2003/04 as a recovery in yields offsets thelower area.

Our overall estimate of world sunflowerseed production points to areduction in output to around 25.4m tonnes compared with the revised totalof 26.6m tonnes during 2003/04.

In the EU-25, rapeseed production prospects for 2004/05 are good toexcellent, thanks to favourable growing conditions. We currently expectoutput to rise by 2.5m-3m tonnes from the 2003/04 total. Harvesting inJuly and August will help to ease the current stock shortage of rapeseed.

Canadian and Chinese output are also expected to increase during the2004/05 season. The Canadian crop has been suffering from moistureshortage but is still expected to exceed 7m tonnes. Some analysts suggestthat Canadian production could exceed 7.2m tonnes (the highest totalrecorded during the past five years). With both an expanded winter sownarea and consequent better yields, Chinese output of rapeseed shouldexceed 11.7m tonnes, more than 0.5m tonnes higher than the 2003/04 levelof production.

The overall total of rapeseed production for 2004/05 looks set to exceed40m tonnes, the highest total seen since the 1999/2000 season, when 42.6mtonnes was produced.

Our estimates of palm oil production have been raised marginally,principally as a consequence of higher estimates of Indonesian output. Thegrowth in Indonesian production is expected to continue into 2004/05 asrecent rainfall conditions have been favourable. In contrast, rainfallamounts in important growing regions of Malaysia have been lower than lastyear, and this may have a detrimental effect on output during 2004/05. Forthe time being we have maintained our forecast growth rate for Malaysianoutput, but it would not be surprising to see reductions in that estimatein the coming months.

There is some concern about the impact of dry weather conditions on copraoutput in the Philippines. However, the dry conditions do not prevail overthe most important coconut-growing areas. We have therefore maintained ourestimates of coconut oil production from that country. In any event, dryconditions reduce yields with a time lag of around 13-14 months, meaningthat any impact is unlikely to be seen until the 2005/06 season, in whichwe forecast only modest growth in production.

We have raised our estimates of palm kernel oil output, principallyreflecting better conditions in Indonesia. Overall, our assessment oflauric oil output in 2003/04 is virtually unchanged, although our estimatefor 2004/05 is higher at 6.8 m tonnes.

Prices for edible oils have moved as expected. Prices have generallyfallen from the peaks recorded in March. For soybean, palm andsunflowerseed, the fall in prices has been generally in line with theforecasts made in our last quarterly report (although the declines havebeen a little larger than anticipated). For soybean, the average second-quarter price fell to US$628/tonne, around US$50/tonne lower than in thefirst three months of the year. For palm oil and sun flowerseed oil, thefall in prices in US dollar terms has been less dramatic, at US$25/tonneand US$33/tonne respectively.

Rapeseed oil has defied the overall trend by recording price rises duringthe second quarter of 2004. During the quarter, rapeseed oil rose to anaverage of US$731/tonne, around US$44/tonne higher than in January-March.The premium of rapeseed oil to soybean oil has now reached more thanUS$100/tonne; in the late 1980s, rapeseed oil traded at a consistentUS$40/tonne discount to soybean oil.

At first sight, it may appear odd that prices have generally declined whenestimates of soybean production in Latin America have been sosignificantly reduced. Indeed, the initial reaction of the market to thereductions was to mark prices higher. However, our analysis suggests thatworld stocks of oilseeds, including soybean, at the end of 2003/04 lookset to end higher than at the year-earlier period. World soybean stocksare forecast to rise slightly to 46.5m tonnes compared with 45.1m tonnesat the end of 2002/03. Total oilseed stocks are expected to rise by almost1.7m tonnes to almost 48m tonnes at the end of 2003/04.

These adequate stock levels, along with the news of cancelled contractsfrom China, have put markets in a bearish mood. There is some marketconcern that current price levels are too low. It is clear that vegetableoil price developments will increasingly be influenced by the prospectsfor the 2004/05 harvest, and especially the approaching northernhemisphere harvests. The current outlook is favourable, with anticipatedproduction levels seeming adequate to cover demand and allow for someincrease in vegetable oil and oilseed stocks during 2004/05. Clearly, therange of possible production outcomes during 2004/05 remains wide at thisstage of the year and, as always, weather developments over the comingmonths will be critical in determining the course of prices. Our currentprojections indicate that prices should continue to weaken over the nextthree quarters, although the reductions will be relatively small. Rapeseedoil is liable to the largest short-term reductions. This reflects both thecurrent very high prices and the impact of new crop supplies becoming available duringJuly and August.

Over the 2003/04 season we expect soybean oil to average US$630/tonne,with palm oil lower at around US$505/tonne. In 2004/05 the pricedifferential between these two oils is forecast to narrow, with soybeanoil prices forecast to drop to about US$587/tonne, while palm pricesshould recover to around US$523/tonne. Both sunflowerseed and rapeseed oilprices are likely to fall by around US$40/tonne between 2003/04 and2004/05, although both oils should continue to trade at a premium tosoybean oil.

For the next two quarters, sunflowerseed oil prices are likely to remainbearish as the balance of the large 2003/04 crop works through the system.However, the expected reduction in the northern hemisphere harvest alongwith the uncertainties about 2004/05 Argentinean output may well encouragehigher prices during the second half of 2005.

Slower growth in palm oil output has been offset by a reduction in demand,such that stock levels during 2004 look likely to remain above the levelsregistered a year. However, the increases in stocks look modest and weexpect that palm oil will recover some of its current discount to soybeanoil during the balance of 2004 and into 2005.