Fats and Oils Prices Gain on Strong Demand, Lower Oils Stock

06 January 2003 00:00  [Source: ICB Americas]

US prices of commodity fats and oils are coming back on track as strong demand buoys the market. Also, global production of major oil-bearing crops, such as sunflower, rapeseed and canola, plunged in 2002. The prospect of continued lower vegetable oils inventory in 2003 may mean upward pricing pressure for vegetable oils.

"Shrinking oil surpluses finally ended a three-year slide in vegetable oil prices," says Mark Ash, oilseed analyst at the US Department of Agriculture. "With seasonally firm demand and significantly low stocks in 2002, US vegetable oil prices rallied ranging from 20 to 50 percent higher compared to 2001."

Crude soybean oil prices in the last two months jumped almost 50 percent to around 23 cents per pound, compared to prices seen in the first quarter of 2002. Average 2002 crude soybean oil price rose 21 percent to 18 cents and 19 cents per pound compared to 2001 average prices of 15 cents per pound. Shrinking vegetable oil supplies have supported soybean oil prices despite higher global soybean production. Domestic consumption of soybean oil has benefited from a shortfall of competing oils, such as sunflower oil and canola oil as well as from minor oilseeds such as cottonseed oil and corn oil.

Similarly, prices for sunflower seed oil, canola oil, cottonseed oil and corn oil all rallied last year. The relative scarcity of sunflower seed oil in 2002 swelled its premium over soybean oil to nearly 11 cents per pound last month. Crude sunflower seed oil prices in 2002 averaged 27 cents per pound, 10 cents higher compared to 2001 average prices.

For cottonseed oil, prices virtually exploded within the last two months, with the average December price quoted at 40 cents per pound. The average price for crude cottonseed oil in 2002 was 41 percent higher at 23 cents per pound compared to 16 cents per pound in 2001. Several reasons have contributed to the rally in cotton oil, says one industry source. "Cotton oil supplies dwindled with steady increase for cottonseed in the feed market leaving fewer supplies available for crush," according to the source. "Exacerbating the situation are cotton harvesting delays and poor oil yield."

Meanwhile, for corn oil, prices soared as well at the end of 2002. Crude corn oil prices are currently quoted at around 28 cents per pound. Corn oil's unusual price discounts that emerged last year have since readjusted to a more typical premium against soybean oil. Corn oil price in 2002 averaged 21 cents per pound compared to 15 cents per pound in 2001.

In the area of imported oils, palm oil and coconut oil are also trying to catch up. Malaysian palm oil prices have moved up 9 percent in November from $394 per ton in October and are 46 percent higher, compared to $290 per ton year-ago levels. Coconut oil prices in Rotterdam in November were 38 percent higher at $457 per ton compared to a year ago. Prices for both palm oil and coconut oil are under upward pricing pressure for 2003 in the wake of wider discounts for both oils last year.

In the animal fats market, demand in industrial and animal feed applications increased in mid- to late 2002. Prices for fats and greases have rallied starting in July of last year as a result of higher demand for animal fats as well as higher global vegetable oils pricing.

"We saw good demand from feed blenders due to higher grain prices. We also had the best demand and pricing for world vegetable oils in general," says Bill Hurley, president of Palos Heights, Ill.-based Hurley Brokerage, which provides independent sales representation to the rendering and packer rendering industries.

Mr. Hurley adds demand from the oleochemicals sector had been good starting in mid-2002. "Oleochemical traders had to compete pound for pound for higher grade fats with the export trade for the first time in years," he says. "We closed 2002 with the highest prices of the years in Chicago packer and renderer grade bleachable."

Last month, prices for most animal fats reached their highest level in 2002. Edible tallow, bleached, averaged 19 cents per pound, while inedible tallow was quoted at around 18 cents per pound. Lard prices were seen at around 18.5 cents per pound while greases were at 13 cents per pound for yellow grease and 16 cents per pound for choice white grease. Averaged prices for most animal fats in December were 5 cents higher compared to a year ago. For 2003, tallow pricing is expected to continue to rise driven by supply in the first quarter due to forecasted tight cattle supplies.

"This could lead to a supply-side rally prior to the South American soybean harvest," notes Mr. Hurley. "If tallow is tight and palm and soybean oil are higher priced than they are now, we could see some run-ups in prices that would produce 20 cents [or higher] inedible tallow trades in the Chicago market for the first time since 1997/98," he adds.

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