Global Oilseeds '97
The 1997 oilseed market year should be remembered for a long time. Prices bottomed out in August, just prior to the start of harvesting the largest combined U.S. oilseed crop on record. Then oilseed prices increased consistently through a rapid harvest.
What makes this so unique is that the rest of the Northern Hemisphere also was harvesting a huge oilseed crop. Canada hiked its canola plantings by 3.5 million acres, and the combined European Union oilseed crop was heading for a record. Yields of canola and sunflower were well above average throughout western Europe. At the same time, South American farmers appeared poised to plant an oilseed crop of unprecedented acreage.
With the exception of sunflower and peanuts, each individual oilseed was being produced in volumes well above 1996 levels. Combined world production of soybean is expected to increase a whopping 18 million tons (12 percent) above 1996. Sunflower seed production will be unchanged this year due to crop losses in the Ukraine and Russia. Canola increased by 3.0 million tons (nine percent). Total world oilseed production is forecast to be 21 million tons (eight percent) higher than last year.
Why, then, in the face of this massive increase in production, did most oilseed prices strengthen by 15 percent from the lows of mid-August?
Part of the reason lies in the very low September ending stocks level. That low level resulted from the reduced oilseed production of 1996 — a time when grain prices (especially wheat) favored those crops over oilseeds.
Despite this year’s large production, total availability of oilseeds is up only 4.5 percent over 1996 due to the low beginning stocks level. On the other side of the equation, however, demand for oilseeds and products has been — and continues to be — very strong. That reality provides the real fuel for the market strength.
El Niño Helps Oil
In the product sector, the oil market finally regained price leadership over meal after a three-year hiatus. Again, there is a production and market demand relationship.
On the production side, Southeast Asia has experienced below-normal precipitation since the spring of 1997. That region is home to the vast majority of world palm oil production. The effects of the drought are not expected to begin impacting production until late in the current marketing year; however, the market always anticipates what is likely to happen.
A series of forest fires in Southeast Asia from August through early October also is expected to impact palm oil yields. A heavy smoke haze minimized available sunshine at the same time fires were damaging some plantations.
Combined, these events have analysts anticipating world palm oil production to remain unchanged this year. Should that projection come to pass, it would the first time in 25 years that world palm oil output has not increased from the previous year. During that period, palm oil production has been enjoying double-digit increases — often one million tons or more per year.
Global demand for oil is expected to increase by about 3.0 million tons, so oilseeds will have to make up the difference in the absence of the usual hike in palm oil. In combination with strong world demand and lower U.S. soybean oil stocks, that has made oil the price leader as of the late fall/early winter of 1997. (Con’t.)
Impact on Meal
With oil as the price leader, what happens to meal?
Given the decline in palm oil production, crushing of sunflower, canola and soybean will be increased to meet the oil demand. That will result in more meal being produced. However, late fall and winter is the traditional time for increased meal consumption — especially in the United States.
Meal exports also remain brisk, and the traditional South American competitors are out of the market until their new oilseed crops arrive in March/April. Feed grain supplies (particularly corn) also are short, so meal is not likely to be a weak second cousin for the entire year.
Stocks of meal at the end of this market year are not expected to increase much (if at all) and are projected to be under the stock levels of two and three years ago. That is impressive, given the huge increase in oilseed production.
Here’s an overview of the global situation for some of the most prominent oilseed products:
— Soybean —
The 1997 U.S. soybean crop is of record size. USDA’s October projection was 74.2 million metric tons (2.722 billion bushels), with an estimated average yield of 39 bushels per acre. This crop represents an increase of 13 percent (10 million tons) over the 1996 soybean harvest.
Nearly all of the other major soybean producing countries are expecting to increase production substantially. The sole exception is China, whose crop was impacted by drought.
South American plantings will be completed by late December. Based on anticipated acreage and average yields, the combined soybean production in South America is expected to increase by 13 percent, to just under 46 million tons. That’s an increase of nearly 6.0 million tons over the prior year.
Should the South American crop come through as anticipated, world soybean stocks are expected to rise from 1997 “bin sweeping” levels. Stocks will still, however, be well under the five-year average.
— Sunflower —
Production of world sunflower remained static. Most producing countries have experienced a rise in production. The exceptions are Russia and the Ukraine, where consistently wet weather has resulted in significant harvest losses and quality deterioration.
Most of Argentina’s sunflower crop should be planted by late December, with acreage expected to expand by 12 to 17 percent over last year. Average yields would generate a crop of 6.1 million tons. That would be 900,000 tons higher than last year and compares to a total U.S. sunflower crop of 1.7 million tons.
World sunflower seed stocks are expected to be very tight once again at the end of the 1997/98 market year. More importantly, sunflower oil should be in strong demand throughout the ’97/98 season, with ending stocks levels likely to decrease slightly.
— Canola —
World production of canola is expected to be up more than 3.0 million tons (nine percent) over last year. The combined production of the European Union has increased by more than a million tons due to expanded plantings and excellent yields. Canada’s canola crop is 1.0 million tons larger on account of a 30-percent increase in plantings.
India and China, both large producers of canola, had slightly bigger crops than those of the previous year.
With strong demand anticipated throughout the season, stocks of both canola seed and oil should decline as of the end of the crop year.
— Palm Oil —
Reiterating the palm oil situation, production is expected to be flat this year due to the biological cycle of the trees, drought and a series of fires in Southeast Asia. (The fires may have destroyed some plantations.)
Palm oil has consistently assumed a large portion of the world vegetable oil market for the past 25 years and is now the second most prominent consumption oil (after soybean). Production has grown from 13.46 million metric tons in 1992/93 to 16.9 million as of 1996/97. That upward trend, along with competitive prices, has propelled palm oil to its impressive growth in market share.
Due to the above-mentioned circum-stances, palm oil stocks as of September 30, 1998, are expected to be about 14 percent lower than those of the year just ended.
The 1997/98 crop year for oilseeds and products is just under way as of this writing. With tight stocks already plugged into the equation, there’s not much room for crop problems. The market is counting on good weather and average to above-average yields in South America.
The final answer will be in as of March/April; but the market will let us know much earlier if problems develop. There is not much margin for error.
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