Tough scenario for oilseed crushers

by Arvin Donley
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Tight supplies and high prices are expected in the oilseed sector in the coming months as a series of weather events over the past year and a half have hampered soybean production in South America and the United States.

Thomas Mielke, director and editor of Oil World, spoke about the global oilseed situation at the annual Soy and Grain Trade Summit, Sept. 17-20, in New Orleans, Louisiana, U.S., which was attended by more than 800 delegates from more than 50 countries.

“It started in the summer of 2011 with a drought that led to a significant decline in oilseed production in the U.S. by 8 million tonnes, including a decline of 7 million tonnes in soybean production,” he said. “That was followed by a second blow in early 2012 when a severe drought in South America reduced the soybean crop by 19 million tonnes from a year ago. On top of that, there has been another drought in the U.S. this summer that has reduced the U.S. soybean crop by another 12 million tonnes. This has had a bullish impact on prices and tightness is particularly severe in the supply of soybeans worldwide.”

He said world soybean supplies for December 2012-Feburary 2013 are projected to be down approximately 32 million tonnes from a year ago. Mielke said South American soybean exports in the September-December 2012 period are expected to plunge by 7.5 million tonnes and by 8.2 million from December 2012 through February 2013. This will raise global demand for U.S. soybeans, but he doesn’t anticipate that the U.S. will be able to make up the difference.

“I believe that during that six-month period (September 2012 through February 2013) U.S. soybean exports can reach at best 25 million tonnes, which is up only slightly from 24 million tonnes a year ago,” Mielke said. “I really don’t believe the U.S. will ship more than 25 million. If it does, the U.S. will be in trouble for the second half of the year. There is already concern among U.S. crushers and livestock producers that they may face insufficient domestic supplies for their needs from April on in 2013.”

Meilke said that theoretically the U.S. could import South American soybeans, but he doubted large quantities would be involved because the U.S. industry was mainly export oriented and there would be logistical problems in importing larger quantities.

“I expect 1 million tonnes of soybeans to be exported to the U.S. this season with 500,000 coming from Canada and the rest being imported from South America,” he said.

With the supply problems occurring due to the drought-stricken U.S. soybean crop, many crushers throughout the world will be depending heavily on the next South American crop, which is due to hit the market in March.

He said South American farmers are making every effort to expand soybean planting. The tentative outlook is for South American soybean production to rise by 36 million tonnes to 152 million in early 2013.

“This will bring considerable supply relief to the market,” he said. “The problem is everybody is going to wait for that first shipment, and everybody wants that first shipment. The question is whether South America, because of its logistical issues, will be able to provide the monthly export quantities that the world requires from March onward. It’s possible that we’re going to have very large quantities of new crop supplies on paper but that it will take time until large quantities arrive at the consumer.”

He also noted that combined production of oilseeds other than soybeans in 2012-13 is projected to decline by 3 million tonnes, which will include a reduction in sunflower output and a slight increase in rapeseed production.

“World crushing of the 10 oilseeds will suffer an unprecedented decline of almost 5 million tonnes from a year ago over the first six months of the season,” Mielke said. “That compares to a year-on-year increase of 8.4 million last season and an average yearly growth of 6 million tonnes during the past 14 years. Soybean crushing alone will likely fall by 3.5 million tonnes during the first six months of the season.”

One promising development in the oilseed market is the continued growth of palm oil. While soy oil and rapeseed oil production is forecast to be stagnant in 2013, and sunflower oil is set to decline, palm oil output is set to accelerate. Palm oil production has doubled every 10 years since the early 1980s.

“There is a rising dependence on palm oil with its exports increasing by 250% since 1997,” he said. “In 2011, world palm oil exports increased by 2.5 million tonnes to 39 million.”

Feed industry trends

Another highlight of the summit, held at the Hyatt Regency New Orleans, was a panel discussion of supply and demand trends in the global feed industry.

Dr. J.E. van Eys of Gans, Inc., who moderated the discussion, said per capita consumption of meat will have increased dramatically between 2000 and 2030, with 145 million additional tonnes of meat needed to meet demand, which will mainly increase in developing countries. He also added that dairy consumption is expected to double during that 30-year period.

“In the next 20 years to meet this increase in meat demand, we will need about 350 million tonnes of feed for animal production,” he said.

Feed from soybeans is expected to increase about 2.5% per year during that period.

George Chamberlain, president, Global Aquaculture Alliance, said soybeans will play a bigger role in the quest to increase the feed supply for aquaculture in the coming years.

The expanding middle class in countries like China is upgrading its diets to include more protein, including fish.

“In Asia, a very popular animal protein is seafood,” Chamberlain said. “There has been a surge in seafood demand that can only be met by aquaculture. China is by far the largest aquaculture producer in the world. Something like over 60% of the world’s aquaculture comes from China, which has been the world’s leading exporter of seafood. But remarkably, China has now become a net seafood importer with the rising middle class consuming so much seafood.”

While fish meal continues to be the ideal protein in aquaculture feed, the supply has become flat in recent years.

“If anything, the supply is falling, because some of the product is going for human consumption,” said Chamberlain, noting that aquaculture uses 60% of the world’s fish meal and 85% of fish oil.

With concerns about the fish meal and oil supply, a tremendous amount of work is being done to find replacements.

“The key replacement is soybean meal for the protein component,” Chamberlain said. “In the case of soybean meal, the main limitation is its anti-nutritional factors. That can be solved by using concentrates. But the difficulty there is the price of concentrates is still quite high and there’s more food-grade concentrates and not as many feed-grade concentrates.”

Another panelist, James Pettigrew, professor in the Department of Animal Sciences at the University of Illinois, talked about the need for feed efficiency as the industry attempts to feed a growing population that is demanding more protein.

“As we project the future in the livestock industry, feed efficiency is the name of the game,” he said. “We do have things we can do to improve feed efficiency. One is that anything we can do to make pigs leaner improves feed efficiency as we measure it. I think it has been encouraging that recently we have seen pigs going to market at a lower weight.”

In terms of pigs and poultry, the industry has been dealing with dramatic changes in the supplies of feed ingredients that are available, he said. Corn in the U.S. has been replaced to some extent with distillers’ grains products such as DDGS, which is a byproduct of ethanol production.

“In the process that has changed the nature of diets somewhat,” he said. “There’s a lot less starch and a lot more fiber. Also, DDGS has generally less fat. Partly because our traditional fat source has been diverted to biodiesel production, we have had to adapt to that. That is exacerbated now that ethanol producers are taking fat out of ethanol co-products. So we’re in an era where we’re learning how to deal with lower energy density in diets for pigs and poultry.”

Agricultural investment

Philippe de Laperouse, managing director of HighQuest Partners, opened the conference with a presentation on how investment interest in the agriculture sector has grown dramatically over the past five years, creating unique opportunities for allocating capital across the supply chain and around the world.

He said institutional investors, which include organizations such as banks, insurance companies, hedge funds and mutual funds, are increasingly looking to purchase farmland.

There are currently several key factors driving farmland values upward, de Laperouse said, including population and GDP growth in developing markets, as well as the biofuels mandates and other industrial uses for grain and oilseed crops, which has created record demand.

Other bullish factors include:
•Global agriculture has seen 4% to 5% annual growth in recent years.
•The total global agriculture market value is estimated at more than $6.4 trillion.
•Global agriculture trade value is expected to increase by 2.7% over the next 10 years.
•Trade of agricultural commodities is forecast to exceed 520 million tonnes in the next 10 years due to rising demand in China, India and other developing countries.
•The rate of increase in supply is slower than the rate of increase in demand.
•High and volatile grain prices are sending price signals for expansion of land used for crop production.

Although crop yields are increasing, Laperouse noted that in recent years the increases have decelerated, which means there is pressure to put more land into crop production to meet demand.

Laperouse said 65 to 68 million hectares will have to be put into production over the next decade to meet demand for grains and oilseeds.

“North America and South America continue to attract the majority of interest on the part of our investors,” he said. “We are seeing more interest in Eastern Europe. We are also seeing North Africa attract more investment as well as sub-Saharan Africa.”