Short Supplies and Growing Demand Steadily Pushed Fat and Oil Prices in 2003

05 January 2004 00:00  [Source: ICB Americas]

The US fats and oils market saw significant price increases throughout 2003 owing to unexpected tight supplies and steady demand in the food, feed and oleochemicals sectors. Fewer cattle and increased consumption meant prices for animal fats surged late in the year. Prices for vegetable oil also climbed sharply as drought struck US soybean oil production, and Malaysia produced less palm oil. Global oil inventories have already been depleted since the second half of 2002 because of lower production of oil-bearing crops such as sunflower, rapeseed, canola and soybeans in the US.

"In the US, the vegetable oil market began 2003 with comparatively ample supplies. However, stock levels were sharply cut by the end of the year by lower vegetable oil output and steady demand," says Mark Ash, oilseed analyst at the US Department of Agri-culture (USDA). "Prices rose steadily for soybean oil throughout 2003 and [because of considerably smaller production] premiums were particularly high for other oils. In 2004, a much tighter inventory and a shortage of new crop soybeans to crush will worsen the domestic supply outlook for soybean oil," he adds.

Domestic soybean oil prices have climbed to their highest level in nine years, according to the USDA. Currently, near 30 cents per pound, average soybean oil prices have seen an uptrend of about 40 to 45 percent from the January 2003 price range, and twice that of January 2002 level. The USDA forecasts season-average soybean oil price for 2003-2004 marketing year at 26 to 29 cents per pound because of projected tight US soybean oil stocks.

In 2003, prices for other oils such as peanut, cottonseed, canola, coconut and palm oil have increased as well, mostly due to overall tight vegetable oil supply. Cottonseed oil prices reached historical highs early last year because of tremendous cottonseed oil output losses in late 2002. Cottonseed crushing in marketing year 2002-2003, which started in October, fell to 2.5 million tons from 2.8 million tons in 2001-2002, said to be the smallest volume of cottonseed crushed in the last century. Crude cottonseed oil prices increased to 50 cents per pound in February, more than 3 times higher than during the previous year. Prices, however, went back down and remained steady at around 33 to 34 cents per pound late last year as cottonseed production for 2003-2004 improved.

Prices for peanut oil have also reached historical highs, steadily increasing to the current 64 cents per pound, 40 percent higher from a year-ago level. Peanut oil stocks were depleted last year because of a sharp decline in 2002-2003 US peanut production, in addition to higher peanut oil demand. Peanut oil supply is expected to improve this year with projected higher peanut output.

Prices for most vegetable oils this year are expected to remain steady or increase slightly from the current levels. However, some analysts say that the price premium for vegetable oils other than soybean, could moderate because of their improved supply outlook. This year, soybean oil prices could climb to their highest level in more than a decade, notes the USDA's Mr. Ash.

Fats Price Sizzles in 2003

In tandem with vegetable oil's price rise is the uptrend in animal fat pricing. The Canadian mad cow disease incident in May caused a severe upward spike in fat prices as the US slaughter declined 4 to 4.5 percent after the government declared a ban on Canadian cattle and rendered protein and fats imports (CMR, 6/9/03, page 9). The ban, coupled with the demand for meats brought about by the popularity of the Atkins and South Beach diets, forced US packers to pull up lighter weight cattle into the market and pushed prices to an all time record high price.

"The cattle sold for slaughter were not finished to the normal specifications, and this severely affected yields causing a supply-side shortage," says Bill Hurley, president of Palos Heights, Ill.-based Hurley Brokerage, which provides independent sales representation to the rendering and packer rendering industries. "At the same time, we saw world vegetable oil demand continue its upward march, as world vegetable oil stocks for the four major oils have fallen to their lowest stocks to use ratio in 24 years."

"Fewer bleached fancy tallow (BFT) supplies and better domestic demand pushed prices to a five-year high," says Bill Dieterichs, market analyst and editor at Jacobsen Publishing Company, which provides oilseeds, oils and fats market analysis. "US domestic industrial demand increased as the US economy strengthened. Meanwhile, as prices were strengthening on lower BFT supplies and good demand, the US bought 23,500 tons of BFT to give away to Pakistan under the Food for Progress Program. This turned out to be like throwing gasoline on a fire, and the price took the jump to 26 cents per pound."

For 2003, average price for BFT is estimated at about 18.25 cents per pound, f.o.b., Chicago, about 4.65 cents per pound higher than the yearly average price and 5 cents per pound above the previous 5-year average, according to Mr. Dieterichs. In December, market price average for BFT stood at 22 cents per pound while edible tallow reached an average of 28.75 cents per pound, 50 percent higher from the same period in 2002.

The fat price outlook in 2004 remains to be seen, according to analysts, as recent news of the first US case of bovine spongiform encephalopathy, also known as mad cow disease, has added an element of uncertainty. Export demand for US rendered fats could be blunted by the incident, possibly leading to the buildup of domestic tallow supplies next year. However, some observers say demand from industrial users for BFT could remain strong due to its continued favorable price, compared to vegetable oils and palm stearin.





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