11 June 2007 00:00 [Source: ICB Americas]
The US cottonseed industry is ramping up marketing initiatives and research and development this year as it faces supply decline and lower meal prices becasue of the unintended consequence of rising biofuel demand as well as increasing edible oil competition. The National Cottonseed Producers Association is increasing efforts to reintroduce cottonseed oil's trans-fat free benefits in the food industry while the Department of Agriculture (USDA) is using genetic modification and new breeding programs to increase cottonseed's marketability.
Around 83% of US cotton planted last year is genetically modified, according to the USDA. With the ongoing cottonseed mergers and acquisition happening between agbiotechnology companies and seed suppliers such as Monsanto with Delta and Pine Land, and Bayer with Stoneville, advocate groups such as the Center for Food Safety are worried that the expanded cotton market share of these companies will result in reduced seed choices for farmers and increasing cottonseed prices.
Higher corn and soybean prices are expected to constrain cotton acreage growth over the next few years. Prospective US cotton planting for 2007 is estimated by the Department of Agriculture (USDA) at 12.1m acres, down 20% from last year.
"The surge in biofuels demand has led to the cotton acreage decline this year, with corn acreage up 15%," says Ben Morgan, executive vice president of the National Cottonseed Products Association (NCPA). "Corn and wheat acreage competition will likely intensify with cotton and soybean growers under pressure. Soybean acreage is also down 11%," he adds.
The USDA estimated cottonseed supply for 2006-07 at 7.9m short tons, down 9% from the year ago level. For 2007-08, supply is forecast to further decline by 8%, to 7.2m tons.
Cottonseed availability is usually determined by the supply and demand for cotton fiber. US cotton producers are said to have been pressured for the past few years by declining domestic demand, coupled with the elimination of textile quotas and large importation of foreign-produced apparel and home furnishings.
Demand getting fuzzy
Around 10-15% of cotton income comes from cottonseed, which is used by the dairy industry as a component of feed (56%) and for crushing to produce oil and meal (36%). Exports account for the rest of cottonseed demand.
The constrained supply this year is expected to reduce cottonseed demand in the feed market as well limit crushing for oil and meal.
The USDA forecasts cottonseed demand for 2007-08 in the feed sector to decline 5% to 3.92m short tons. Demand in 2006-07 was also down 11% to 4.12m short tons compared to the year-ago level.
Increased availability of feed substitutes such as dried distiller's grain (DDG), a by-product of corn-based ethanol production, further pressured cottonseed demand and prices in the dairy market, the National Cotton Council (NCC) reports.
"Whole cottonseed prices decline 36 cents/short ton, and cottonseed meal by 26 cents for every $1/short ton decrease in DDG prices," says NCC.
Cottonseed crush for 2007-08 is forecast to decline 6% to 2.5m short tons, according to the USDA. Total cottonseed meal demand for 2007-08 is projected to decline to 1.1m tons compared to the previous year's 1.2m tons.
"Biofuel production is producing an excess of some protein feed products such as soybean meal and DDGs, and cottonseed meal must compete for market share," a USDA oilseed analysts note.
"Cottonseed meal prices will face pressure from an increase in other meals," adds NCPA's Morgan. "Whether the increase in vegetable oil prices offsets the decline in meal prices remains to be seen."
Current cottonseed meal prices are now quoted around $145/ton compared to this year's peak of $220 seen in March.
Oil price thickens
Cottonseed oil pricing is currently surging along with the other fats and oils' rising prices, as the entire vegetable oil complex remains under pressure from the increased biofuel demand and tightening supply.
Recent quotes for cottonseed oil prices are around 39-40 cents/lb., compared to the average 30-31 cent/lb. range that was seen in January.
"Vegetable oil prices will likely increase further, adding some measure of profit margin to crushers. However, price rationing can also be seen as the US currently has a deficit of domestic vegetable oils," says Morgan.
Demand for vegetable oils is also under pressure for the trans-fat-free trend in food products. "Some oils such as cottonseed are increasingly being used to meet the demand for trans-fat-free oils," adds Morgan.
Still, cottonseed oil demand in the food sector is being eclipsed by marketing efforts of the canola oil and olive oil industries as well as rising popularity of newly developed oils such as NuSun sunflower oil and high-oleic, low-linolenic soybean oils.
The NCPA says it is increasing efforts to reintroduce cottonseed oil as a versatile, trans-fat-free oil in the food industry.
"Cottonseed oil has fallen into the shadow of more dominant vegetable oils in recent years," notes NCPA's Morgan. "Soybean oil, for example, dominates the domestic edible oils market with 80% share. Smaller-scale players like canola and sunflower oils, meanwhile, dominate mindshare thanks to aggressive marketing efforts."
Cottonseed oil accounts about 5% of the US edible oils market, according to the NCPA, with market value ranging from $200m-300m annually. The USDA forecasts total cottonseed oil demand in 2007-08 to decline 3%, to 801m lbs.
With the help of the USDA's Agricultural Research Service (ARS), marketability of cottonseed oil and meal is also being improved by developing value-added uses, increasing cottonseed yields through genetic engineering and reducing processing costs through new technology.
Other research areas the USDA-ARS and NCPA are looking into are genetic modification of cottonseed oil's fatty acid for industrial use, new breeding programs to tailor the oil's fatty acid composition to be similar to such as that of NuSun oil and the development of formulations to tailor cottonseed oil to specific applications.
"These areas could address some of the current problems or improve the marketability of cottonseed products," a USDA research scientist notes.
"Demand surge in biofuels has led to the cotton acreage decline this year"
Feeling the pinpricks of challenges
Agbiotech majors Monsanto and Bayer CropScience expanded their global cottonseed share with Monsanto's recent $1.5bn acquisition of Delta and Pine Land (DPL).
"The acquisition will make Monsanto the dominant cotton player with roughly 50% market share," notes Citigroup Research analyst P.J. Juvekar. "Monsanto is replicating the successful strategy it undertook in corn and soy in the '90s. Back then, Monsanto bought Dekalb and Asgrow and quickly pushed its traits through the channel. We believe it can do the same in cotton."
Bayer, meanwhile, is acquiring for $310m Monsanto's Stoneville cottonseed business, which the company divested as part of antitrust compliance. Stoneville's NexGen franchise, a regional cottonseed business in Texas was not included in the deal. The acquisition will expand Bayer's US cotton share from 24% to 36%.
"The acquisition is a great fit -boosting Bayer's germplasm and geographical diversity. However, the profitability of Stoneville will be substantially lower for Bayer than for Monsanto as it will also remain a Monsanto licensee," notes Citigroup Research analyst Andrew Benson. "Basically, 70% of the trait income will go to Monsanto," he adds.
Over the last two years, Bayer expanded its US cottonseed market shares with the acquisition of Texas-based Associated Farmers Delinting and California Planting Cotton Seed Distributors. In December, Bayer also purchased the cotton assets of Texas-based Reliance Genetics.
Stoneville's Nexgen cottonseed brand as well as certain cotton germplasm from DPL were purchased by Lubbock, Tex.-based Americot for $6.8m. The acquisition will make Americot the third-largest US cottonseed company, says general manager Terry Campbell.
Phytogen Cottonseed, a joint venture between Dow AgroSciences' Mycogen and J.G. Boswell Company, says its customers will continue to get wide varieties of high-performing cotton traits despite the ongoing mergers.
"While others in the industry have been focused on getting bigger, we've been working on getting better," says Joe Sobek, global business leader for cotton at Dow AgroSciences. "A heavy investment in continual R&D makes our varieties a choice growers can count on today and in the future."
Around 83% of US cotton planted last year is genetically modified, the USDA reports. According to the advocate group Center for Food Safety, agbiotech majors' 90% control of the cotton market will result in reduced seed choices for farmers and increasing cottonseed prices.
LATE SPOT PRICES
|Crude vegetable oils|
|Coconut oil, t.l. N.Y.||lb.||47c|
|Corn oil, Midwest||lb.||33.50c|
|Linseed oil, Minneapolis||lb.||48.25c|
|Peanut oil, Southeast (rest.)||lb.||67c|
|Soybean oil, Decatur, Ill.||lb.||34.77c|
|Refined vegetable oils|
|Coconut oil, t.w. N.Y.||lb.||55c|
|Corn oil, jumbo tanks, N.Y.||lb.||44.75c|
|Palm oil, N.J.||lb.||50c|
|Peanut oil, jumbo tanks, N.Y.||lb.||66.10c|
|Soybean salad oil, N.Y.||lb.||40.07c|
|Cottonseed, 41% bulk, West Texas||ton||$145|
|Linseed, ext., 34% bulk, Fargo, N.D.||ton||$125|
|Soybean, unrest., 48% bulk, Central Ill.||ton||$229.60|
|Fats & greases|
|Grease, white, choice, tanks, dlvd., Chic.||lb.||31.50c|
|Grease, yellow, max, 10% dlvd., Chicago||lb.||27.25c|
|Lard, loose, bulk, tanks, dlvd., Chicago||lb.||30.50c|
|Tallow, inedible, fancy, tanks, dlvd., Chic.||lb.||33c|
|Tallow, edible, bleach, tanks, dlvd., Chic.||lb.||34.50c|
SOURCE: ICIS CHEMICAL BUSINESS AMERICAS
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