Consulting Agency UkrAgroConsult
On September 20, at the start of a new oilseed season, major oilseed sector representatives already traditionally gathered in Kyiv, at Hilton Hotel, to participate in the VI International Conference “Black Sea Oil Trade-2018” organized by UkrAgroConsult. The general sponsor of the conference was the US company ST Equipment & Technology.
Global transformations are underway in the oilseed market this season. They were triggered by the following two factors: changing weather conditions worldwide and the trade war between the US and China. The latter factor had a particularly strong impact on the entire world market of oilseeds. The conference participants discussed how these and other factors would influence the global market development this and next seasons. Special attention was paid to Ukraine.
UKRAINIAN OILSEED MARKET SHOULD CHANGE ITS DEVELOPMENT STRATEGY
“At the moment, Ukraine faces the following main tasks: diversification of production, product quality and search for new markets. This is what the Ministry is working on now. Our goal is to act within the framework of the current agreements with exporters and, without violating them, generate added value here, in Ukraine. This will make it possible to create new jobs, set up production facilities in Ukraine and attract investors. Thus, we will be able to take up production of all possible vegetable oils and their export abroad,” noted Olga Trofimtseva, Deputy Minister of Agrarian Policy and Food of Ukraine, while opening the conference and greeting its participants.
However, these tasks cannot be solved without taking into consideration global trends and prospects for their further development.
“In the coming 10-15 years, the main driver of the entire global economy and its individual markets will be escalating competition, which will have critically important peculiarities,” were the words with which Sergey Feofilov, Director General of UkrAgroConsult, began his presentation.
According to him, the above include slowing growth in global vegoil trade: according to FAO and USDA forecasts, it will gain 18-20% in the coming decade against a 40% gain in the previous one. Another factor aggravating competition will be protectionism: some 600 decisions regarded as protectionist ones were issued last year, or twice as many as in 2010.
“The markets will undergo global transformation over the next ten years global, and those at which Ukrainian vegetable oil is now targeted, will change,” Sergey Feofilov noted.
Competition develops in all areas, including production. The expansion of plantings is one of tools in this respect.
“What can be said about potential for expanding the planted areas in Black Sea countries? These expansion prospects are quite impressive. What can be said about other regions? Brazil is expected to enlarge its soybean and corn acreage by 55% over the coming 5-7 years. This implies that the country will boost oilseed production, crushing and exports. So, the market share of the competing regions will grow,” said S. Feofilov.
Projecting all these trends onto Ukraine’s oilseed sector, everything looks well from the viewpoint of raw material provision: a good sunseed crop is expected this year. So, total production of oilseeds in 2018 is forecast at 21.7 MMT, including 15 MMT of sunseed, 4 MMT of soybeans and 2.7 MMT of rapeseed. The crops of all oilseeds will increase in the future owing to their higher profitability compared to other crops. However, a decrease in their margin is inevitable.
“Our forecasts about a drop in oilseed production margins, which we made for 2017, came true. It is difficult to make forecasts now, because the market is heavily influenced by political factors this season. Vegetable oil prices fall now, with sunflower oil price being at a 10-year low,” stressed Sergey Feofilov.
According to UkrAgroConsult’s forecasts, it is the current season when the rise in exports will drop behind growth in foreign exchange revenues. In other words, profitability in the oilseed sector will show a still steeper downward trend. What needs to be done?
“It is not the time to change the development strategy of Ukraine’s oilseed sector. If left unchanged in the coming 10-15 years, it may entail negative consequences. According to our estimates, this strategy already now undermines competitiveness of our oil in the world market. And already the oilseed sector of Ukraine asks the government for help in order to change its competitiveness (a so-called “soybean” law). We believe that the role of government support will enhance, but how stable will it be?” said Sergey Feofilov.
According to him, Ukrainian vegoil producers should consider the following two development scenarios: either to leave the situation unchanged, or to modify the current strategies of the fat-and-oil sector.
Under the strategy-changing scenario, it is expedient to change, first of all, the attitude toward sunflower oil and position it as a premium-quality product.
“Sunflower oil is now perceived as an ordinary product, almost no one is aware of its unique properties. Look at olive oil: investment in shaping the brand of this oil currently pays back with its highest price in the market: olive oil is 3-5 times more expensive than other vegetable oils this season,” Sergey Feofilov emphasized.
But it is undoubted that a particularly close eye should be kept on global trends while shaping a new market development strategy.
GLOBAL TRENDS IN THE WORLD OILSEED MARKET: COMPETITION, POLICY AND WEATHER
This season, policy and weather conditions will be the main factors determining price formation and cropping patterns in major oilseed and vegoil producing countries.
“The main factors which will influence prices in the following years include China, India and trade barriers, said Ben Buckner, Analyst with AgResource, USA, in his speech when analyzing fundamentals and development trends of the global oilseed sector.
According to him, global demand for oilseeds grows at a faster pace than that for grains – corn and wheat: it gained 136% this year, while demand for corn and wheat increased 79% and 27%, respectively. The analyst said it strengthened mainly due to growth of the planet’s population and, consequently, consumption. In 2018, global per capita consumption of vegoils was already as high as 24 kg against 19 kg in 2010.
“We see oilseed yields increase from year to year. However, we forecast some downturn in 2019: the average yield will be at 2.53 MT/ha. Reviewing individual oil crops and their main growers, the following situation can be observed: a 12% gain in U.S. soybean production is predicted this year, while rapeseed production in Canada will increase 14%. As before, the top players in the sunseed market are Ukraine and Russia: they are expected to boost production by 28% and 20%, respectively. However, when compared to the figures of the 2000’s, it can be concluded that sunseed output declines,” Ben Buckner explained.
Ben Buckner pointed out that the oilseed market presently plays a key role in the world. This is even proven by the fact that the USA and China use it in their political and trade struggle. This situation affects prices very much. Therefore, despite growing demand, oilseed prices are falling. The greatest decline is in prices for soybeans and soybean oil: for instance, sunflower oil from the Black Sea region is almost USD 100/MT more expensive than US soybean oil. When asked by conference participants what is to be done to make prices grow or at least reach last year’s level, Ben Buckner pointed out: “This is not only because of the US and China. I believe, an important role is played by trade barriers and weather conditions. The market may recover by at most 3-5%.”
“At the moment, the whole world watches the Brazilian market take over opportunities that the USA is losing,” said Fabio Meneghin, Partner at Agroconsult, Brazil, while presenting development vectors of the soybean markets in South America and the USA.
Estimating the global soybean market, Fabio Meneghin noted that the world soybean trade is under influence of Chinese duties on American soybeans. As the US has reduced soybean supplies to China, this niche will be occupied by Brazil, which will be able to substantially increase revenues and trade turnover with China. In turn, the USA will step up soybean exports to Europe and other countries.
There are three major soybean market players in South America (Brazil, Argentina and Paraguay), and it is this continent that has become the top grower and market price marker over the past 30 years.
“Another expansion of Brazilian plantings is expected in the 2018/2019 season, by 2% to 36.2 Ml ha. Production profitability in the country is set to increase 1.5% due to entering the Chinese market. However, the situation may get adjusted by global production: predicted product oversupply in the world market may adjust our price expectations,” said Fabio Meneghin.
However, farmers’ plans may all be changed by weather: drought continues expanding and it may become a global problem shortly.
While estimating Europe and the Black Sea region, Kyle Tapley, Senior Agricultural Meteorologist with Radiant Solutions, USA, pointed out that drought would remain the main problem there. The absence of rainfalls in the fall will have a beneficial effect on corn and soybean harvesting. At the same time, there is a threat of uneven emergence of winter wheat.
“The weather situation in North America is more stable: this summer saw no single drought areas or excessive precipitation. The situation has somewhat changed now. Wet weather in the south of the Middle West will slow maturation and harvesting of corn and soybeans, but such conditions in the south will contribute to good sprouting of winter wheat. There is not threat of frost events,” Kyle Tapley noted.
In South America, meteorologists forecast the emergence of a moderate El Niño event in the near future – this is unlikely to have any strong impact on the crop.
According to Kyle Tapley, no significant planting delays are forecast in Brazil, but the problem of drought may arise in the near term. Argentina, on the contrary, is expected to receive abundant precipitation.
In general, the weather factor will not adjust crop and price forecasts considerably next season. However, in the global perspective, farmers around the world will face a change in usual growing conditions.
TRADE WAR BETWEEN CHINA AND U.S.: IMPACT ON PRICES
“The trade war between the U.S. and China will play a big role in the market. We have to think today how to get out of this situation,” stated Paul MсAuliffe, President of World Commodity Analysis Corporation, USA, when analyzing the price vector of the world oilseed market.
The present situation may affect oilseed planted areas in the American continent, as well as prices.
“Supposedly, this trade war will go on, and China will stop importing soybeans from the U.S., except for some minor volumes. This situation will lead to a drastic shift in planted areas from soybeans to corn and other crops, because farmers already seek to avoid the impact of U.S. product exports to China on their financial stability,” said Paul MсAuliffe when describing key trends in the American market.
“Farmers will sow this crop in case of demand and price. Government support to farmers plays a big role in the U.S. though. Soybeans will continue to be part of crop rotations because they are a very good preceding crop. However, the overall planted area will be some 5 Ml ha smaller. Moreover, many American farmers have already sold all their crop from 2019 and even 2020 at fixed prices, Paul MсAuliffe explained the situation and added: – However, as soybean inventories are high and because of tense relations with China, we predict the planted area of corn to expand by some 2 Ml ha.”
In addition, the expert stated that there are still no prerequisites for resolving the conflict between the two market leaders – China and the U.S.
Production of all vegetable oils is forecast to be more or less stable in the 2018/2019 season. For instance, global output of soybean oil is predicted to gain roughly 3 MMT. The same course of developments is expected in production of palm oil. At the same time, production of sunflower oil will increase insignificantly, as well as rapeseed oil.
In this situation, Ukraine may tap into new markets, but it is still too early to speak of China, said Oksana Prosolenko, Ukraine Country Director of the Donau Soja Organisation, in the course of a discussion.
“We are now in a period of very complicated market changes that may give Ukraine good opportunities. While it is still too early to speak of exports to China, shipments to the EU are very likely to rise. Since the European Union purchased very much soybeans from Latin American countries, a deficit of this commodity may arise in the EU because China’s market is now opened to them,” said Oksana Prosolenko.
UKRAINE’S MARKET: WHERE OPPORTUNITIES CAN BE FOUND
With regard to the sunseed segment, one of the most promising markets for sunflower oil as of today is India, where consumption increases from year to year due to growth of the country’s population.
“Consumption of vegoils in India presently approximates 21 MMT a year, with domestic production covering just 7 MMT of this volume. The population growth rate is some 2% (20 Ml people) a year, therefore imports will also continue to rise rapidly. I expect vegoil imports to increase to 25 MMT over the next ten years. Per capita consumption is also predicted to grow, from 16 kg to 24 kg,” said G. Chandrashekhar, Global Agribusiness Expert, India Q&A in his presentation “Roadmap for Branding Ukrainian Vegoil in the Indian Market.”
Sunflower oil’s portion in the overall market structure is just 14%, whereas the lion’s share there (60%) is held by palm oil.
According to G. Chandrashekhar, vegoil imports to India currently consist mostly of crude product, which is then refined and packed already in the country. This reduces both duties and delivery costs. There is a possibility to export already bottled vegoils, but this would not secure a higher profit margin for producers – the reasons include higher duties, at least twice as expensive delivery, other costs.
“In such a situation, it could be promising for Ukraine to jointly brand and produce bottled oil from Ukrainian oilseed at Indian crushing facilities,” said G. Chandrashekhar.
With regard to processed products, sunseed crushers should also pay attention to new opportunities, including an American technology allowing to substantially increase profit margin of sunseed processing. This technology was presented at the conference by Kyle Flynn, Business Development Director, ST Equipment & Technology, USA.
Protein flour, which is used for feeding animals, becomes increasingly popular in the oilseed crushing market now. It is due to high protein content that soybean flour is in strong demand. It is $175/MT more expensive than sunseed flour, but 90% of this product is made from GM-soybeans. Therefore, researchers started studying the possibility of raising protein content in sunseed flour.
“We’ve tried to use the method of electrostatic separation of flour from oilseeds. This was the subject of recent studies by many scientists. The point of the process consists in grinding sunflower cake and exposing it to electrostatic separation. The absolute increase in protein content exceeds 18% (from 30% to 48%)”, Kyle Flynn shared his experience.
Such innovative developments will allow making sunseed processing a more profitable business: while the current scheme of sunseed processing (sunseed is purchased at market price and processed into valuable oil and low-value flour) yields on average $94 per one ton of sunseed, the flour enrichment with protein by the STET method produces a net profit of $118 per one ton of sunseed.
Julia Garkavenko, Oilseed Market Expert, UkrAgroConsult, believes that, in view the shortage of raw materials for Ukraine’s crushing industry, the following two future scenarios can be considered:
1- Giving into the global trend and expanding oilseed acreage.
2 – Starting oilseed imports?
The former scenario seems unlikely, as Ukraine cannot expand cannot expand its oilseed-planted area infinitely, because this affects primarily grain crops. So, sunseed replaced wheat as the main crop in the Ukrainian market in 2018.
The latter scenario may apply to the soybean market. The examples include Turkey and Argentina, which import soybeans either for processing into compound feeds or for utilizing own crushing capacities. However, Ukraine has sufficient potential for increasing own oilseed production by raising yields. This would reduce the shortage of oilseeds for crushing and considerably expand the share of high value-added products in Ukraine’s total exports.
This year’s conference was very practical for all participants of the oilseed sector. Time will tell what the new season be like, but both farmers and crushers have to assess the world market situation already now in order to make plans for the future.
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