Tallow Oversupply Worsens As Supplies Outpace Demand

15 May 2000 00:00  [Source: ICB Americas]

By Alice Naude

The tallow market remains in serious oversupply despite strong domestic demand from the feed industry. Exports are weak and a larger-than-expected slaughter increased supply during the first half of the year by almost 3 percent compared to the same period in 1999. Pricing is hovering about 1 cent off its historical lows and is characterized as extremely competitive.

"We haven't seen much recovery," says Mitch Kilanowski, executive vice-president of marketing and research at Darling International. "But, we expect things to get better toward the end of the second quarter."

"We believe we are in the recovery phase," adds another manufacturer. "The first quarter saw increased domestic demand in both the edible sector and the refinery business, but people accumulated large inventories in anticipation of Y2K problems, and it took until April and May to work off those inventories."

Strong demand from the feed sector has prevented the market from cratering, a third supplier says. "The domestic feed people are running as hard as they can," he says. "We can't see better from the domestic side. The market has bottomed out and is starting to turn up. But we're still not a threat to palm oil yet."

Oilseed markets that compete with tallow, primarily South American soy oil and Southeast Asian palm oil, are also in oversupply. Foreign buyers have turned to those sources, weakening overseas demand for US oilseed products and tallow.

Tallow is used in animal feeds to improve feed efficiency, for positive metabolic effects and as a source of essential fatty acids. In industrial markets, tallow is primarily used in soaps and detergents.

Domestically, those markets have been strong, particularly the feed sector. "There's lots of tallow going to feeds," says a manufacturer. "We've really topped out in that area." Feed makers are generally buying higher-grade tallow. "At these cheap prices, the feed people would rather go with high quality beef," the manufacturer adds.

However, lower grades of tallow, used in pet foods and lower-priced feeds, are facing slower demand. Part of this is attributed to competition from genetically modified corn oil (GMO) and high-oil corn. Those, like tallow, are used in animal feeds.

"GMO is being used as a tallow replacement for lower-priced grades of tallow in feed formulas," says Mr. Kilanowski. But such competition is expected to be only short term. "We don't expect to see it for more than 30 days," he notes.

"GMO and high-oil corn have not been a big problem," a manufacturer says. "Right now, we're also seeing some people introduce wheat in place of tallow."

Trends on domestic oilseed pricing are also being watched as tallow makers follow weather conditions in the Midwest. "We're looking at a potential drought in the Midwest that will affect corn and soybean production," says Mr. Kilanowski. "We've already seen soybeans move up 3 cents per pound over the last two to three months. But if there's no drought and we get trend-line yields, it'll be a record harvest and low prices for tallow."

Tallow plants are inundated with cattle bodies. "We're moving huge supplies of steer and heifer to slaughter, and this will not slow up very much," says David Weaber, and analyst at Cattle-Fax, a member-based cooperative that provides market analyses to cattle producers.

He adds, "Year-to-date slaughter will add up to 350 million more pounds of beef in the first half of this year, as compared to the first half of 1999. That's 13.5 billion pounds, as compared to 13 billion last year, an increase of about 2.7 percent. We don't expect any significant declines in supplies until September.

"Cheap corn is another significant factor. Feed growers have been at all-time low prices during the last couple of years, which has contributed to the extra-weight steer and heifer on the market. Grain farmers have bought cattle and are using their grain to feed the cattle--essentially selling them as value-added corn."

Mr. Weaber notes that for many animals, slaughter was pushed into the beginning of the year. "The prospects for wheat pasture weren't so good this year, so instead of cattle being stockpiled in a grazing program, they went into the feed lots.

"We also had record high utilization of last year's calf crop, driven by cheap corn and profitability in the feed sector. A lot of these went to slaughter earlier than usual and pushed up supplies. We expect decent relief from this by the fourth quarter."

Prices in the Midwest are: bleachable fancy tallow, 10.5 to 11 cents per pound; edible tallow, 11.5 to 12 cents per pound; choice white grease, 10.5 to 11 cents per pound; and lard, 12 cents per pound.

Domestic demand for tallow remains steady. According to SRI International, a consultancy based in Menlo Park, Calif., US tallow and grease consumption will increase from 2.58 million metric tons in 1996 to nearly 2.65 million metric tons by 2001, an average annual growth rate of 0.5 percent.

The largest domestic demand for tallow and grease is in animal feeds, including livestock, poultry feeds and pet foods. SRI considers this the only area of growth for the animal fats industry.

Other major world producers are the European Union (15 percent), China (9 percent) and Australia (6 percent), according to SRI. The largest consumers of tallow and grease are the US (35 percent), the European Union (19 percent), China (11 percent) and Mexico (5 percent).

FATTY ACIDS--Pronova says that a nationwide labor dispute involving production, transportation and service workers has curtailed production of the company's EPAX marine omega-3 essential fatty acids.

"The strike has forced the closing of production facilities in Alesund and Sandefjord," the company says. "This comes at a time when Pronova and Pharmline, the exclusive representative of EPAX marine omega-3 products in North America, have formed a new division to ensure sufficient inventory of all EPAX products, especially the highly concentrated triglyceride forms of EPA and DHA."

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