Canola Council of Canada

The Supply and Demand Outlook

Dennis Maxfield
Publisher,
The Trade News Service

Good morning ladies and gentlemen. First let me thank Barbara Isman and the Canola Council of Canada for inviting me here to speak with you about the near term global outlook for oilseeds. My name is Dennis Maxfield and I am the owner of "The Trade News Service". For those of you that are unfamiliar with Trade News, let me offer a brief introduction. This year marks the 90th year that Trade News has reported news, prices and statistics to the fats and oils trade. And now, let’s take a look at the current supply and demand outlook for oilseeds.

World oilseed production is currently forecast at a record 343.6 million tonnes, 13 percent more than 5 years ago, a 51 percent increase over the past decade, and 2.68 times that seen in 1975. As we’ll see, this estimate is likely to see a significant downward revision in the weeks and months ahead.

Soybean production accounts for a majority of the increase, and totals roughly 58 pct of this year’s oilseed supply. Coming in second is rapeseed/canola, at 11 percent of the total, with cottonseed at 10 percent. World peanut or groundnut output will account for roughly 9 percent of the total, with sunseed at 8 percent. Palm kernel production accounts for just over 2 percent of the total production figure, with copra rounding out the total, at 1.6 percent of the total.

SOYBEANS – Another record production season is forecast for 2003/04, with world production currently projected at 198.9 million tonnes. That’s a 69 percent increase during the past ten years, but only a 1 percent increase from last season.

US production of 2.418 billion bushels, or 65.8 million tonnes, accounted for one-third of the world’s total output, a far cry from the 70 percent seen in 1975. US production was off for the second year in a row, with some in the trade suggesting that we’ll run out of beans by the third quarter of this year. Let me assure you, we’ve never "run out" and this year will be no different. The only question is, what level will prices have to rise to in order to ration demand? Let me also assure you that if I had the answer to that question, I probably wouldn’t be standing here today.

While the size of the US crop is a given, South American output has come under close scrutiny as almost daily reports reports from Brazil, in particular, are trimming the size of the current crop. While the magnitude of the reduction in the size of the Brazilian crop is yet to be finalized, it is becoming increasingly apparent that the USDA has overestimated the size of the crop. While the USDA’s most recent projection of Brazilian production totaled 59.5 million tonnes, a 13 percent increase over last season, it is our opinion that this figure is just too high. Within the past two weeks alone, the Brazilian state of Parana, the country’s second largest producing state, cut its crop estimate by 14 percent to 10.2 million tonnes from an initial estimate of 11.8 million tonnes. Similarly, a few days later we heard from Rio Grande do Sul, the country’s third largest producer, that crop analysts had cut production by 26.8 percent from an initial estimate of 9.6 million tonnes to 7.0 million tonnes. In just those two states alone we have a reduction of 4.2 million tonnes. Using last month’s USDA forecast of 61 million tonnes, this would leave us with 56.8 million tonnes. Add in losses from Asian soy rust, and such a level could easily be trimmed further. We believe at this point in time that the Brazilian crop will ultimately be cut to between 54 and 55 million tonnes.

Then there’s the Argentina. Dry weather across much of the growing area prompted the Agriculture Secretariat last week to cut soybean production for the 2003/04 marketing year to 34.5 million tonnes, a two million tonne drop from the most recent USDA estimate and down 2 percent from the current season’s 35.27 million tonnes. Further, there is a good possibility that should current weather conditions persist Argentina’s soybean crop will come in well below that level.

This chart is just a sampling of the cumulative precipitation charts for the Cordoba region. As you can see rainfall for the current season has been running well behind normal, and this particular area is right in the heart of the growing region of Cordoba, Santa Fe (to the east and north) and Buenos Aires (to the east and south). Most beans in that area should be entering or already be in the critical flowering stage stage of development, and from everything we’ve heard and read there needs to be widespread shower activity across the region soon.

Add up these two factors, a shorter than expected crop in Brazil and the possibility of the same for Argentina, together with an already tight US crop, and world soybean supplies could easily fall below the 196.8 million tonnes on hand a year earlier. In other words, things are already tight, and they could get a lot tighter.

Even with these cuts, the world could see a record soybean crush of just under 175 million tonnes. Looking at the current US balance sheet, the one thing that jumps out to us is the fact that the USDA is still looking at a 150 million bushel reduction in crush from last season. Season-to-date (Sep-Jan), the US has crushed 19.355 million tonnes of soybeans.

During the same period in the 2002/03 marketing year, US crushers processed 19.337 million tonnes of soybeans. That means that if the USDA’s 39.87 million tonne US crush projection is to be met, crush for the remaining seven months of the season (Feb-Aug) would have to drop to an average of 2.93 million tonnes per month, or roughly 108 million bushels. Last week’s NOPA report for the month of February showed that crushers processed just under 124.2 million bushels. The pace has not slowed down.

Currently, world soybean exports for the 2003/04 marketing year are expected to reach nearly 65 million tonnes. If achieved, this would be a 5 percent increase over 2002/03, and more than double the 27.76 million tonnes shipped a decade earlier. Like the situation with crush, US soybean exports face a significant reduction if the current USDA projection is to be met. US exports for the first five months of the current marketing year were up 12 percent from the same period in 2002/03, totaling 16.059 million tonnes. In order for the USDA’s 24.2 million tonne forecast to be realized, monthly exports would have to slip to an average of 1.166 million tonnes per month, or 42.8 million bushels. Obviously, this is a doable figure, and we would expect export demand to fall off in order to support the current crushing pace, but again export demand for US beans over the next five months will largely depend on what happens with South American production.

The net result is that end-Aug stocks of soybeans are currently expected to fall by 3.39 million tonnes from the previous year’s record 39.27 million tonnes, to 35.9 million tonnes. However, the current situation in South America could leave end-stocks somewhere in the 31 to 32 million tonne range, levels which were seen at the end of the 2000/01 and 2001/02 seasons, respectively. While we’re not ready to make any price forecasts under such a scenario, it’s almost a sure thing that prices would be steady to firmer depending upon the magnitude of the reduction.

RAPESEED/CANOLA – Global production of rapeseed and canola has increased 48 percent over the course of the past decade, topping out in 1999 at 42.525 million tonnes. The most recent projection for the 2003/04 marketing year is 38.444 million tonnes. Canadian production of canola bounced back to 6.670 million tonnes, from 2002/03’s rought-reduced crop of 4.178 million tonnes. Similarly, although on not the same scale, Australian canola production rebounded from last season’s drought-reduced crop of only 790 thousand tonnes, to an estimated 1.62 million tonnes. 2003/04 also has seen a sizable jump in production in both China and India. Larger planted area and favorable weather conditions pushed Chinese production to a record 11.410 million tonnes, while Indian production was put at 6.200 million tonnes (the largest since 1996/97). European Union production, which accounts for around 25 percent of the world’s total, is estimated at 9.480 million tonnes.

Our "very preliminary" assessment for the the 2004/05 marketing year is that global production will come in around 40.135 million tonnes, an increase of 4 percent over the current season’s output. Of this total we expect that, given favorable weather conditions during the growing season, Canadian production could reach 7.52 million tonnes, an increase of nearly 13 percent over the current season and the largest crop since the 1999/2000 marketing year. Currently, there are a number of concerns over the fact that snowfall (and therefore spring runoff) has not been adequate ahead of this spring’s planting. This is one area which the trade will be watching quiet closely for any signs of a repeat of 2002/03. Looking at the demand side of the Canadian market for a moment, we expect that the combination of strong demand from the domestic crushing industry (spurred by some of the best crushing margins seen in years), and good export demand from Japan, Mexico, China, and others such as Pakistan and Iran, will trim stocks at the end of July of this year to just below the current estimate of 800 thsnd tonnes.

Returning to the global market, an increase in planted area should help boost Chinese production to around a record 11.955 million tonnes, an increase of 4.7 percent over the current season’s estimated 11.410 million tonnes. It is also expected that the Indian government will continue to encourage the production of rapeseed, and that 2004/05 production will increase to around 6.450 million tonnes or up 4 percent on the year. The EU will see a modest increase in production, to roughly 9.520 million tonnes.

World canola/rapeseed crushings for 2003/04 are expected to reach 35.874 million tonnes, a 15 percent increase, and largely the result of the recovery in Canadian, Australian and Indian production. We’re projecting world crush for the 2004/05 season to rise by 3.6 percent, to 37.171 million tonnes, with the largest increase seen in China. Looking at the export market, Canada will retain its position as the leading source in the global market for canola/ rapeseed, shipping an estimated 3.60 million tonnes during the current season, a 50 percent increase from the previous year. We see Canadian exports of 3.85 million tonnes for the 2004/05 marketing year, particularly if the Canadian dollar remains somewhat favorably valued against most other foreign currencies. Australia will be the world’s second largest exporter, shipping 1.15 million tonnes during 2003/04. This is more than double the level recorded during the 2002/03 season. Given normal growing conditions, Australian exports for 2004/05 are projected to slip lower, to around 1.12 million tonnes, largely due to the increase Chinese production. Global exports for the 2003/04 season are estimated at 5.678 million tonnes, and we’re looking for an increase to 6.028 million tonnes for the 2004/05 marketing year.

Factoring in food use and feed, seed and waste, ending stocks for the current marketing year should come in around 1.77 million tonnes. Given the scenario outlined above for the 2004/05 crop year, global stocks at the end that season should remain relatively tight, rising to around 2.01 million tonnes.

COTTONSEED – World cottonseed production certainly hasn’t seen the impressive growth rates that have been enjoyed by soybeans and canola/rapeseed. In fact, production for the current marketing year, estimated at 34.955 million tonnes, is only 5 percent above the average for the previous 10 years. China is the world’s leading producer of cottonseed, with a 25 percent share of the world’s output, or an estimated at 8.780 million tonnes for the 2003/04 season.

At 6.073 million tonnes, the United States commands a 17 percent share of world cottonseed production, with India producing 5.385 million tonnes (15 percent of the world’s total) and Pakistan 3.309 million tonnes (9 percent of the world’s output). Noteworthy is the fact that this season’s Indian cottonseed production is the highest since the 1998/99 season, while Pakistan’s output is the lowest in five years. The one noteworthy point with regard to the upcoming 2004/05 season is that the Chinese government has set a goal to raise cotton production by 30 percent from last year. Given current seed to lint ratios, Chinese cottonseed production could reach nearly 11.50 million tonnes. However, here again, everything is dependent upon the cooperation of Mother Nature. Last year the Chinese increased their planted area of cotton by 20 percent from the year before, but because of poor growing conditions production, and thus seed production, was actually down from the year before.

World cottonseed crush for 2003/04 is estimated at 25.804 million tonnes, or 74 pct of the total produced. It is interesting to note that while capacity for soy, rape and canola have risen dramatically over the past decade, crushing capacity for cottonseed has remained relatively steady due largely to the relatively low oil extraction rate and the problems associated with the removal of the sometimes toxic gossypol.

Since exports of cottonseed total only a little over 1.0 million tonnes I’ll wrap this segment up by taking a quick look at ending stocks. Cottonseed stocks at the end of the 2003/04 season are expected to remain about unchanged at 372 thsnd tonnes, their lowest level since the end of the 1986/87 marketing year.

PEANUTS - World peanut, or groundnut, production for the current marketing season is projected at 32.096 million tonnes. This is an increase of 5.8 percent over the 30.340 million tonnes produced during 2002/03, a year when India’s production crumbled as a result of a late and spotty monsoon season. India is the world’s second largest producer of groundnuts, with China continuing to hold the number one spot with 42 pct of the world’s production. In contrast, since 1993 the US has produced an average of 6 percent of the world’s peanut supply.

Unlike other oilseeds, only about 50 percent of the world’s peanuts are crushed for oil. World peanut crush for the 2003/04 season is estimated at 15.580 million tonnes, an increase of 10 percent over the previous year’s total. Peanut exports are relatively small, totaling just under 2.0 million tonnes.

World ending stocks of peanuts for the 2003/04 crop year are forecast at 603 thousand tonnes. This is up 83 thousand tonnes from the end of 2002/03, and the second smallest level since the end of the 1980/81 season.

SUNSEED – World sunseed production has more than doubled since the mid-1970’s, and is currently estimated at 25.856 million tonnes. The 2003/04 production estimate is up 8 percent from the previous season, due largely to increases in Russia and the Ukraine. Both countries have seen production rise by 1.0 to 1.2 million tonnes, and it is expected that further increases will be seen in the upcoming season should the weather remain favorable. US production, which accounts for about 5 percent of the world total, posted a modest gain for the year, coming in at 1.209 million tonnes versus 1.129 million in 2002/03. Most other areas of the world are expected to see production levels remain about the same as in 2002/03. The main exception is Argentina, which currently expects a crop of about 3.4 million tonnes, up from 3.0 million in 2002/03.

World sunseed crushings for the 2003/04 crop season are expected to increase by about 1.3 million tonnes from the year before, to 22.288 million tonnes. This will be the fourth largest sunseed crush on record. Although Russia and the Ukraine have seen sizable increase in production, a good portion of their seed output will be headed to the export market (mainly Eastern Europe). Argentine crush is expected to decline by 200 thousand tonnes, to 3.1 million tonnes, the lowest level since the 1992/93 season.

With sunseed exports for the current season estimated at 3.34 million tonnes, up from 2.72 million tonnes in 2002/03, world ending stocks are expected to see a modest decline from last season’s 899 thsnd tonnes, to 882 thousand tonnes.

PALM KERNEL/COPRA - Touching briefly on palm kernel and copra output, will round out the overall supply and demand picture for global oilseeds. Palm kernel production has risen almost steadily over the past 30 years, and is currently estimated at a record 8.06 million tonnes. This is an increase of nearly 6 percent over the previous season’s output of 7.628 million tonnes. We expect that barring an "El Nino" or cyclonic event, that palm kernel production will continue to grow as plantation expansion projects are underway not only in major producing countries, but also in India, Pakistan, Mexico, Brazil, Colombia and number of African nations.

World copra production, on the other hand, has with few exceptions remained relatively steady over the past 30 years. Philippine production for the 2004 calendar year is expected to be off about 100 thousand tonnes from last year’s 2.5 million tonnes.

Since nearly all copra and palm kernel production is processed, ending stocks are generally very limited. End-stocks of palm kernel for the current marketing year will total around 150 thousand tonnes versus last season’s 160 thousand tonnes. Copra stocks for 2003/04 will total only around 20 thousand tonnes, unchanged from the end of the 2002/03 marketing year.

SUMMARY - In summary, ladies and gentlemen, world oilseed production is projected to rise around 4 percent for the current marketing year, to 343.6 million tonnes. However, due to the current weather conditions in South America which will reduce the size of this year’s soybean crops, we believe that the current estimate is overstated and will actually come in more around 6 million tonnes below the current estimate, or around the 337.6 million tonne level.

Steady growth in the world’s population, and an improved global economic outlook (particularly in developing countries), will drive strong demand for protein meals and edible oils. This, in addition to the current relative weakness in the value of the US dollar against most foreign currencies, will continue to spark export demand for oilseeds and products. Additionally, the containment and eradication of avian flu in the Far East, and in particular China, is expected to rekindle export demand for soybeans. As a result of all the above, we expect to see world exports of the major oilseeds top a record 76.0 million tonnes. If so this would be an increase of 4 percent increase over the 74.0 million tonnes shipped during 2002/03 and more than double the amount done just 10 years ago.

Similarly, world oilseed crush is expected to reach a record 287.7 million tonnes. A good portion of that increase, approximately 4.6 million tonnes will come in the form of canola and rapeseed. Soybean crush could continue to meet the USDA’s 174.96 million tonne estimate. If so, that would draw world soybean stocks down to around 33.7 million tonnes.

Factoring in food use and seed, feed and residual end-Sep 2004 global oilseed stocks could tumble to 33.7 million tonnes, well below the USDA’s most recent estimate, and the tightest level since the end of the 1998/99 marketing year. At the same time, the world stocks/use ratio would drop to 8 percent, the tightest level since the end of the 1995/96 season.

The only other main point of contention is what will happen in the United States this spring/summer? With world stocks already expected to be at a 5 year low, it is critical that US soybean production rebound to a pre-2003 level. Any hints of drought will drive market prices for soybeans and products even higher. This in turn would prompt greater consumer demand for cheaper oils, such as palm, and edible oil stocks would continue to tighten. The world oilseed complex is vulnerable to any type of "bad news", and the summer of 2004 could be very profitable for the "halves" of the world.

Thank you ladies and gentlemen!

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