Oil Crops Situation and Outlook Yearbook. Market and Trade Economics Division, Economic Research Service, U.S. Department of Agriculture, October 2003, OCS-2003. Contents Summary Outlook for 2003/04 U.S. Soybean Review, 2002/03 Situation for Other U.S. Oil Crops Cottonseed Peanuts Sunflowerseed Other Oilseeds Other Fats and Oils Highlights World Oilseed and Protein Meal Situation World Vegetable Oil Situation List of Tables Report Coordinator Mark Ash (202) 694-5289 E-mail: MASH@ers.usda.gov Principal Contributors Mark Ash (Soybeans, Other Oilseeds, Vegetable Oils) Erik Dohlman (202) 694-5308 (Peanuts) Wilma Davis (202) 694-5304 (Statistics) Editor Dana Rayl West and Martha R. Evans Graphics, Table Design & Layout Wynnice Pointer-Napper Approved by the World Agricultural Outlook Board. Summary released October 23, 2003. Summaries and full text of Situation and Outlook reports may be accessed electronically via the ERS website at www.ers.usda.gov/. To order, call 1-800-999-6779 in the United States or Canada. Other areas please call (703) 605- 6220. Or write ERS-NASS, 5285 Port Royal Road, Springfield, VA 22161. Note: Due to a change in the report schedule, the next Oil Crops Yearbook will be published in March 2005. The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, sex, religion, age, disability, political beliefs, sexual orientation, or marital or family status. (Not all prohibited bases apply to all programs). Persons with disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact USDA’s TARGET Center at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, DC 20250-9410 or call (202) 720-5964 (voice and TDD). USDA is an equal opportunity provider and employer. Summary The 2002 soybean harvest was determined to be 2,749 million bushels from 72.4 million acres harvested. Record levels for domestic crushing and exports in the preceding year had reduced 2002/03 beginning stocks to 208 million bushels, compared with 248 million a year earlier. Together, they cut the 2002/03 supply by 179 million bushels from 2001/02 to 2,962 million. U.S. soybean exports to most countries (excluding China) declined in 2002/03, slipping to 1,045 million bushels from the record 2001/02 exports of 1,063 million. Processors could defend profit margins from rising soybean costs only by scaling back operating time at oil mills, which reduced the 2002/03 crush to 1,615 million bushels from 1,700 million in 2001/02. Even with use rationed in the final quarter, season-ending stocks dropped to 169 million bushels from 208 million in 2001/02. The depletion of supplies strengthened the 2002/03 national average farm price to $5.53 per bushel from $4.38 in 2001/02. The season average price for soybean meal rose to $182 per short ton versus $168 per short ton in 2001/02. Heavier use of distillers' grains and corn gluten helped limit the domestic consumption of soybean meal in 2002/03, which fell 3 percent to 32.2 million short tons. Greater domestic consumption and foreign production of soybean meal depressed U.S. soybean meal exports to 6.05 million tons in 2002/03 from 7.5 million in 2001/02. Even with a smaller output of soybean oil, large carryover stocks allowed U.S. soybean oil exports to remain relatively high at 2,250 million pounds. Total soybean oil demand remained constant in 2002/03. However, a reduction in the supply by nearly 1 billion pounds sharply cut the ending stocks from 2,359 million to 1,486 million pounds for the smallest carryout in 4 years. The season average price strengthened to 22.0 cents per pound compared with a 2001/02-average of 16.5 cents. Domestic cottonseed output for 2002 dropped 17 percent from the previous year to 6.2 million short tons. The shortfall raised the season average farm price for cottonseed to $100 per ton from $93 in 2001/02. Consequently, cottonseed crushing fell to 2.5 million short tons in 2002/03 from 2.8 million in 2001/02. Domestic cottonseed oil output slumped in 2002/03 to a modern era low of 725 million pounds. A large price premium stifled both domestic and export demand for cottonseed oil, which plummeted to 636 million and 110 million pounds, respectively. U.S. sunflowerseed production in 2002 fell more than one-fourth to 2,490 million pounds. Although sunflower planting declined only 2 percent in 2002, harvested acreage fell 15 percent. The season average farm price for sunflowerseed (all types) climbed to 12.2 cents per pound, its highest level in 9 years. A severe 805-million pound reduction in the oil-type sunflowerseed supply led to domestic processors consuming only 703 million pounds, the least since 1978/79. Sunflowerseed oil exports, which dropped by three-fourths to 110 million pounds, bore the brunt of the supply shortage, although domestic consumption also fell to 268 million pounds, down 28 percent from 2001/02. World oilseed production rose to 328.9 million metric tons for 2002/03, from 324.4 million the previous year. Soybean production gained 11.9 million metric tons to 196.4 million, more than offsetting production declines for other oilseeds. Larger crops from Brazil and Argentina accounted for nearly all of the soybean increase. Brazilian soybean production surged to 52.5 million tons in 2002/03, up from 43.5 million the year before. Argentine soybean production rose to 35.5 million tons in 2002/03 from 30.0 million in 2001/02. China’s 2002/03 soybean imports soared to 20.3 million tons from 10.4 million in 2001/02 after an extension of the transition period for its import regulations on biotech crops. Outlook for 2003/04 More Serious Damage to the U.S. Soybean Crop Discovered The October Crop Production report indicated that the impact of last summer’s drought was significantly worse than first thought. New survey data for many States found lower counts of pods with beans. Crop prospects were also diminished in many areas by disease and pest problems. The United States Department of Agriculture's (USDA) forecast the 2003 soybean yield at just 34.0 bushels per acre, down from the September forecast of 36.4 bushels and well below last year’s yield of 38.0 bushels. This would be the smallest yield since 1993. The harvested area estimate was shaved to 72.5 million acres based on 2003-crop preliminary USDA administrative data, which (when combined with the lower yield) cut the October soybean production forecast to 2,468 million bushels. That crop is 175 million bushels smaller than the previous month’s estimate. If realized, it would be 281 million bushels less than the 2002 harvest and the smallest soybean crop since 1996. As of October 26, 85 percent of the U.S. soybean harvest had been completed, which is on par with the 5-year average. Total soybean supplies for 2003/04 were buoyed slightly by findings from the latest Grain Stocks report that beginning stocks (at 169 million bushels) were 29 million higher than the previous forecast. That report also indicated a larger final estimate (up 19 million bushels to 2,749 million) for the 2002 soybean crop. However, those results were dwarfed by the magnitude of the reduction in the 2003 crop. U.S. export sales of soybeans are strong this fall as foreign buyers are securing their near-term supply requirements. As of October 16, exporters had sold 470 million bushels of soybeans, up from 360 million a year earlier. However, future sales should slow as rising U.S. prices prompt foreign buyers to look for signs of better buying opportunities next year from South America. In addition, an unusually rapid rise in ocean freight costs particularly to Asia (which is escalating because of heavy demand by other types of bulk cargo) may encourage foreign importers to postpone some near-term buying. The U.S. export forecast for 2003/04 was lowered to 870 million bushels, down 70 million from the September forecast. As in 2002/03, the rapid commitment of soybean supplies to foreign buyers is exacerbating the plight of domestic crushers. Compelled to bid more aggressively for this season’s smaller domestic supply, U.S. processors must receive higher prices for soybean meal and oil to maintain profitability. While values in the vegetable oil market are strengthening, for soybean meal there could be greater resistance to a higher price. Greater availability of protein feed substitutes, both here and abroad, will make them more favorably valued against U.S.-produced soybean meal. These were reasons for another reduction in the 2003/04 crush forecast to 1,510 million bushels. Year-ending stocks of soybeans could get very tight even with a large reduction in use. The 2003/04 carryout is seen slipping to just 130 million bushels. The only way to insure that there will be even a minimal soybean carryover is for prices to increase. Between August and September, soybean prices in central Illinois rose sharply, about 80 cents per bushel. By mid-October, prices were still rising to about $7.25 per bushel, their highest level in 6 years. The expected season average soybean price was raised to $6.05-$6.95 per bushel from $5.25-$6.15 previously. The number of U.S. hogs and pigs on September 1 was 2 percent lower than it was a year earlier. There should be some increase in pig crops over the next year, however, as farrowing intentions are down just 1 percent for the fall and they are even with last year for the winter quarter. Poultry producers are likely to increase the number of birds fed next year, also. While these factors should help support total feed demand, the comparatively higher cost of soybean meal could restrict its consumption in 2003/04. Central Illinois soybean meal prices are expected to rise to $185-$215 per short ton. Domestic disappearance of soybean meal is again forecast lower for 2003/04 at 31.3 million tons. Foreign end users have even more options and U.S. exports of soybean meal are seen sliding 17 percent to 5.0 million tons. The lack of domestic output is also anticipated encouraging a record volume of soybean meal imports near 340,000 tons. Soybean oil prices have risen sharply since August (to nearly 28 cents per pound) because of the threats to potential supplies. The reduced crush and stock carryover is expected to slash 2003/04 soybean oil supplies by 2.15 billion pounds. Apart from the impact of last summer’s drought on the expected availability of soybeans for crushing, a freeze in early October may have hurt some late-planted fields in the northern Midwest and Ohio River valley. This event may ultimately reduce oil yields and quality for soybeans that did not fully mature by that time. Average soybean oil prices in 2003/04 are projected to rise to 23.5-26.5 cents per pound. The last time that soybean oil prices were as high was in 1997/98, although the reasons then were primarily related to strong demand rather than a short supply. Prices at this level will severely constrain the potential for U.S. soybean oil exports in 2003/04, which would be down more than 60 percent from the previous season. Ending stocks of soybean oil do not have as much room to fall as they did in 2002/03, when nearly 800 million pounds were consumed from storage. The projected 2003/04 carryout of 1,218 million pounds would be less than a month’s rate of use. Therefore, the tightening supply will most likely impose a reduction on the domestic use of soybean oil, as well. U.S. disappearance is forecast declining in 2003/04 to 16,600 million pounds, which would be down more than 2 percent from the preceding year. Greater use of canola oil, corn oil, sunflowerseed oil, and cottonseed oil next year should offset the loss of demand for soybean oil. Soybean Shortage To Boost Domestic Demand for Other Oilseeds As with soybeans, a dry summer in North Dakota and South Dakota in 2003 also curtailed production of sunflowerseed. For the second consecutive year, sunflowerseed yields were hurt by a lack of rain. The national average yield was forecast at 1,152 pounds per acre, a slight improvement from 2002’s 1,142 pounds, but still below average. Yields improved from last year in all States except North Dakota (the national production leader). Based on an expected harvested area of 2.3 million acres (up 4 percent from 2002), production for both oil type and confection type sunflowerseed would total 2,619 million pounds. Progress of the sunflower harvest in North Dakota was advancing more quickly than usual, with about one-third complete by mid-October. Despite the disappointing yields, quality of the crop is reported to be generally good. A comparatively comfortable level of carryover stocks (mostly held by processors) will help boost total supplies. With a very strong market anticipated for the oil, the 2003/04 sunflowerseed crush is expected to nearly double to 1,370 million pounds. Yet, exports of sunflowerseed oil are unlikely to expand greatly because of an acute need to retain domestic sources of vegetable oil. Although sunflowerseed oil exports could recover to around 200 million pounds in 2003/04, this would still be far below annual volumes shipped abroad during the last decade. In contrast, domestic disappearance could grow by 44 percent to a record high 385 million pounds. A greater sunflowerseed crush will also contribute more sunflowerseed meal to the country’s protein meal supply. Recent prices for sunflowerseed oil and oil-type sunflowerseed have been pulled up along with soybean oil. Current bids for oil-type seed range from $10.50 to $11.00 per hundredweight, which is now only marginally lower than a year ago. At current values of nearly 33 cents per pound, sunflowerseed oil prices are still very high. But, once processors are replenished with new crop supplies, the likely crush resurgence should somewhat narrow the premium for sunflowerseed oil against soybean oil by next year. Domestic output of canola seed is estimated down just 0.4 percent in 2003 to 1,546 million pounds. In the upper Midwest, there was a recovery from below-average 2002 canola yields, but these were offset by a loss of 190,000 harvested acres. While acreage abandonment was considerably lower in 2003, farmers planted only 1.1 million acres versus 1.5 million last year. Producers are likely to see 2003/04 canola prices above the previous year and again well above the marketing loan rate. The most prominent change to the 2003/04 canola outlook, however, will be the improved supply availability from Canada. A much better Canadian crop will allow domestic crushing to climb back near full capacity. U.S. canola seed imports are expected to increase nearly 50 percent to 639 million pounds. Even that rebound in domestic oil production may not be sufficient, however. A deficit of soybean oil supplies will likely prompt a steady stream of canola oil imports from Canada, which encounter no import duty. U.S. canola oil imports could exceed 1,200 million pounds. Domestic disappearance of canola oil could climb to a record high 1,687 million pounds. U.S. production of cottonseed is forecast up 4 percent in 2003 to 6.4 million short tons. The cotton area harvested is down 0.3 million acres from 2002, but an improved yield is responsible for the bigger crop estimate. A larger Australian harvest should boost U.S. imports of cottonseed, also. This extension of supplies should help revive the domestic cottonseed crushing industry. Processors have suffered from a lack of favorably priced seed in recent years as cattle feeders have used increasingly more cottonseed in their rations. But there should be enough good quality cottonseed available in 2003/04 to permit growth in cottonseed feeding as well as a recovery in crushing to around 2.75 million tons. Like other oilseeds, strong domestic demand for cottonseed oil will encourage as much production of it as practical. Stable Outlook for U.S. Peanuts in 2003/04 On the strength of good growing conditions throughout the main peanut producing regions, U.S. peanut production in 2003 is projected at 3.95 million pounds, up 631 million (19 percent) from 2002. Although planted acreage was down about 3 percent from 2002, production will rebound on the basis of a record national average yield and a drop in abandoned acres from 61,300 acres in 2002 to an estimated 38,000 this year. The national average yield is projected at 3,095 pounds per acre, an improvement of 21 percent compared with 2002. Despite a 631-million-pound production gain, overall 2003/04 supplies are projected just 20 million pounds higher, largely due to lower carryover stocks that fell to 875 million pounds from the previous year’s record level of 1,476 million. Projected 2003/04 peanut use is down 180 million pounds to 3,817 million. Slightly increased domestic food use and exports are more than offset by a lower crush and residual use. The 2003/04 season average farm price is projected to range from 16.25 to 19.25 cents per pound, compared with 18.24 cents in 2002/03. Strong Expansion of South American Soybean Area Anticipated The disappointing outcome from the 2003 U.S. soybean harvest makes the world even more dependent on the success of the next crop in South America. The strong price rally already underway is encouraging farmers in Brazil and Argentina to expand their planting intentions. In Brazil, internal prices for soybeans are generally equivalent to a year ago, when producers increased area by 13 percent. USDA now projects that Brazilian soybean area will expand by 14 percent in 2003/04 to 21.0 million hectares, up from the previous forecast of 20.0 million. A soybean area that high would also raise projected output for Brazil to 60.0 million metric tons, compared with the previous forecast of 56.0 million and 2002/03 production of 52.5 million. Although better prospects for the new Brazilian soybean crop are doing little to calm current market prices, they are moderating the rise of futures prices, particularly for March and May 2004. As output heads in opposite directions for the two countries, Brazil could surpass the United States in soybean exports for the first time with projected 2003/04 shipments rising to 26.0 million tons. Brazil had long ago outstripped U.S. exports of soybean meal and is projected to widen that gap by exporting 16.5 million tons over the next year. Smaller Domestic Harvest Expected To Buoy China’s Soybean Imports The USDA estimate of China’s 2003 soybean production was lowered to 16.2 million tons from 16.5 million previously. Although 2003 soybean area in China expanded by 8 percent, yields in the northeast were knocked below average during a difficult growing season. Soybean imports by China for 2002/03 were expected to about double from the previous year’s 10.4 million tons. Many shipments had been scheduled to arrive before September 20, when interim regulations on biotech imports were set to expire. Early in September 2003, the government formally announced that the interim period would be extended to April 20, 2004. But, exporters could not apply for safety certificates on cargoes bought for fall shipment until after September 20. So, the inability to obtain the required documents in a timely manner forced some contracts to be cancelled or deferred and will once again interrupt China’s soybean imports during October and November. Yet, China’s soybean imports should resume soon as consumption remains brisk. While there have been minimal shipments over the last few weeks, U.S. export sales to China are up about one- third from a year ago. USDA has projected 2003/04 soybean imports by China up to 20.5 million tons, compared with the September forecast of 19.0 million. A smaller domestic soybean harvest will support import needs and the unpredictable administration of China’s import regulations is encouraging processors to accumulate stocks whenever possible. Although China’s 2003/04 ending stocks should stay relatively high in historic terms at 4.0 million tons, they could decline moderately from the estimated 2002/03 carryout of 4.5 million tons. Imports of soybean oil by China have been accelerating for several months and should stay active for some time because of the higher cost for obtaining soybeans. USDA raised its forecasts of China’s soybean oil imports to 1.5 million tons in 2002/03 and 1.3 million in 2003/04. Favorable Outlook for Indian Oilseed Harvests Firm prices and favorable weather are also encouraging Indian farmers to seed more area to rapeseed starting this month. Indian rapeseed area is expected to reach 6.6 million hectares, which would be up 20 percent from the previous forecast. With normal yields, Indian producers could be expected to harvest 5.5 million tons in 2003/04, up from just 3.6 million tons the year before. Production gains from other summer-sown crops would increase total oilseeds in India by 7 million tons to 25.8 million. As a consequence, domestic production of vegetable oil could expand in 2003/04 by 1.4 million tons. While Indian vegetable oil consumption could rebound by a robust 7 percent, improved domestic supplies should curb import requirements. Indian imports of palm oil in 2003/04 are forecast declining 7 percent to 3.7 million tons, while soybean oil imports are seen slipping 5 percent to 1.5 million. U.S. Soybean Review, 2002/03 Summer Drought and Heat Cut 2002 U.S. Soybean Yield Based on the March 2002 Prospective Plantings report, U.S. farmers intended to plant 73.0 million acres of soybeans, down from 74.1 million acres planted the previous year. At the time, many Corn Belt producers were reacting to considerably lower fertilizer expenses for corn and a relative shift between the new loan rates for corn and soybeans. However, soybean prices had climbed sharply from early February 2002. In addition, corn planting had fallen behind due to excessive wetness in a band stretching between western Ohio and eastern Kansas. The delays compelled farmers to switch intended corn area to soybeans. In North Dakota, farmers expanded soybean planting (mostly at the expense of wheat) by 520,000 acres. Soybean acreage rose nearly a half-million acres in the South as very low cotton prices discouraged cotton planting. In the Delta region, extremely wet soil conditions also hampered planting of corn and cotton and favored planting more soybeans. At the end, there were 73.9 million acres of soybeans planted in 2002, only slightly less than the previous year’s 74.1 million. Warm July weather helped accelerate the soybean crop’s emergence in the East following a lag in planting. But, the heat wave also began a drying out of parts of the central Great Plains. The dryness spread eastward during the summer with Missouri, Illinois, Indiana, and Ohio each receiving less than half of the normal rainfall. Throughout October, tropical storms in the Gulf of Mexico pushed frequent and substantial rains up into the South and Midwest, which further hampered and degraded the soybean harvest. A summer drought in the western Corn Belt and harvest-period storms in the South caused the number of unharvested acres in 2002 to be larger than usual at 1.5 million acres. Yields fell short in most States because of below-average moisture (except for Minnesota, where abundant rains produced a record yield). The national average yield dropped to 38.0 bushels per acre. Besides the drought, the U.S. average yield was also held down by a 1-million-acre reduction in the highest yielding States (Illinois, Iowa, Nebraska, and Minnesota) while acreage increased in some States with below-average yields (North Dakota and Mississippi, in particular). The 2002 soybean harvest was determined to be 2,749 million bushels from 72.4 million acres harvested. Record levels for domestic crushing and exports in the preceding year had reduced 2002/03 beginning stocks to 208 million bushels, compared with 248 million a year earlier. Together, they cut the 2002/03 supply by 179 million bushels from 2001/02 to 2,962 million. Strong Foreign Demand Buoys Soybean Exports but Smaller Crop Lowers Crush U.S. soybean exports to most countries declined in 2002/03, slipping to 1,045 million bushels from the record 2001/02 exports of 1,063 million. Trade with the European Union (EU) was curtailed by a brisk pace of South American soybean meal shipments. U.S. soybean exports to the EU dropped 76 million bushels from the previous year and were the smallest in two decades. Sluggish growth in EU livestock production and large imports of feed wheat from the Black Sea region (as well as greater domestic supplies of damaged wheat) also limited EU feed requirements for protein meal. China was the conspicuous exception to the contraction of U.S. exports. China’s strong crush margins and a lack of rapeseed supplies largely countered the losses from soybean markets elsewhere in the world. U.S. soybean exports to China almost doubled in 2002/03 to 284 million bushels to account for more than one-fourth of total U.S. trade. U.S. shipments were also supported by delayed harvests in Brazil and Argentina. Even with a soybean supply that was nearly 200 million bushels lower than the previous year, exports started strongly and kept up with the record 2001/02 pace as late as July. Eventually, higher U.S. prices began to ration demand everywhere, although more so for the domestic than the export market. The comparatively resilient export demand bled away even more supplies from the domestic market. Competition with foreign crushers for U.S. soybeans forced domestic processors to bid up prices for soybeans, which put crushing margins under great pressure. On average, the soybean price paid by Illinois processors ballooned by $1.11 per bushel over the previous year. Thus, processors could defend profit margins only by scaling back operating time at oil mills, which reduced the 2002/03 crush to 1,615 million bushels from 1,700 million in 2001/02. At the same time that supplies were tight, an abundance of foreign soybean meal production crowded out U.S. meal exports and a contraction in hog feeding suppressed domestic consumption. While comparatively firm soybean oil demand helped support processors, a large stock carryover and a high oil extraction rate were also tempering the incentives to crush. Capacity utilization rates had already begun a steep decline by January 2003, although there was a temporary recovery for processors in July. July was marked by waning soybean exports and seemingly good prospects for the 2003 crop that helped to weaken farm prices and bolster crush margins. In addition, there was a brief resurgence of farm sales when 9-month marketing assistance loans began to mature for soybeans placed under loan in late 2002. In line with the worsening crop conditions, soybean prices started to rally strongly by July 2002. Prices were pushed back down in October by harvest pressure, but relatively brisk export sales soon signaled that stocks would rapidly tighten. Soybean stocks as of June 1 (at 602.3 million bushels) were the smallest since 1998 and significantly below the 684.9 million in stocks the previous year. Even with use rationed the final quarter, season-ending stocks dropped to 169 million bushels from 208 million in 2001/02. In absolute terms, this carryout was the smallest since 1997. Such a carryout did not leave much of a cushion for the price impact of a disappointing 2003 harvest. The depletion of supplies strengthened the 2002/03 national average farm price to $5.53 per bushel from $4.38 in 2001/02. Total use outpaced total production, but a low level of U.S. soybean stocks has less influence on the overall price level than it used to. The main reason is the growing influence of South American supplies, which no longer allow prices to rise to the same level of a decade or more ago. U.S. stocks comprised just 12 percent of the world carryover, compared with the early 1980s when U.S. stocks routinely accounted for approximately three-fourths of world stocks. To illustrate the price impact of that change, the ratio of soybean ending stocks to use fell to 6 percent in 2002/03, which was comparable to the 1996/97 ratio but at an average price far lower than the $7.35 per bushel seen for that season. Other factors, such as delivery time improvements, are contributing to lower storage needs. U.S. producers have been able to lock in farm commodity prices through expanded use of loan deficiency payments and futures options and thereby minimize their use of physical storage. The higher market price and lower loan rate ($5.00 per bushel) virtually eliminated loan deficiency payments and marketing loan gains for the 2002 soybean crop. Counter-cyclical payments (which were first introduced in 2002 farm legislation) also were not required. A counter-cyclical payment would be triggered only if the market price falls below $5.36 per bushel, which equals the soybean target price ($5.80) minus the fixed direct payment ($0.44). Soybean Meal Demand Encounters Stiff Competition A large accumulation of meat stocks in early 2002 pressured slaughter prices for both hogs and poultry, which consume most of the country’s soybean meal. On August 31, 2002, U.S. stocks of red meat and poultry in cold storage had ballooned by 30 percent and 28 percent, respectively, from a year earlier. By mid-2002, much lower slaughter hog prices and sharply higher feed costs were forcing a liquidation of the breeding herd, which by early 2003 had curtailed the size of new pig crops. There was nearly no increase in poultry production from the previous year, either. Although there were much smaller supplies of sunflowerseed meal and canola meal available in 2002/03, heavier use of distillers' grains and corn gluten helped limit the domestic consumption of soybean meal. A strong expansion for U.S. ethanol production in recent years has widened the availability of these mid-protein feeds. An above-average protein value for the 2002 soybean crop may also have trimmed feeding requirements. Each of these factors dampened U.S. soybean meal disappearance for 2002/03 to 32.2 million short tons, down 3 percent from 2001/02. Greater domestic consumption and foreign production of soybean meal depressed U.S. soybean meal exports to 6.05 million tons in 2002/03 from 7.5 million in 2001/02. U.S. shipments of soybean meal to major Asian markets (the Philippines and Thailand, in particular) were down sharply. Relatively high soybean meal prices were responsible for curtailing both domestic and foreign demand. By July 2002, the monthly average soybean meal price in central Illinois had soared to $187 per short ton from $170 the previous month. Like the prices for soybeans, soybean meal values softened following the fall harvest but gained strength throughout 2003 as the rate of crushing sagged. The season average soybean meal price rose to $182 per ton versus $168 per ton in 2001/02. To ease comparatively high costs in the Southeast, feed producers from the region imported close to 100,000 tons of soybean meal from Brazil. Lower Output, Buoyant Demand Cut Surplus Soybean Oil Stocks By the end of 2002/03, world vegetable oil stocks had fallen to their smallest level in 5 years, which fueled a brisk rate of foreign vegetable oil imports. Unlike soybean meal, U.S. exports of soybean oil were able to stay competitive with a robust pace of South American shipments. Even with a smaller output of soybean oil, large carryover stocks allowed U.S. soybean oil trade abroad to remain relatively high. Exports for 2002/03 were 2,250 million pounds, although down moderately from 2,519 million in 2001/02. In spite of increased U.S. exports to some countries (notably China, Cuba, Canada, and Mexico) these market gains were more than offset by lower shipments elsewhere (principally Bangladesh, Turkey, India, and South Korea). The U.S. share of global soybean oil exports declined to 10 percent in 2002/03 from 13 percent in 2001/02. An 800-million-pound reduction in supplies of sunflowerseed oil, canola oil, and cottonseed oil from 2001/02 supported 2002/03 domestic consumption of soybean oil. Yet, higher prices moderated the rate of soybean oil domestic disappearance. End users were able to draw down inventories that had been accumulated at lower costs earlier in 2002. Total soybean oil demand remained constant. However, a reduction in the supply by nearly 1 billion pounds sharply cut the ending stocks from 2,359 million to 1,486 million pounds for the smallest carryout in 4 years. Substantially tighter soybean stocks and domestically available soybean oil supplies helped boost soybean oil prices in 2002/03. Prices were already edging up throughout the spring of 2002 and rallied strongly throughout the summer and fall. When the soybean oil price peaked in May 2003 at 23.2 cents per pound, it was more than 60 percent higher than its February 2002 low. By the spring, there was greater resistance to the price climb because of assurances for an ample new South American harvest and good prospects for the autumn U.S. crop. Palm oil was becoming attractively priced against soybean oil in world markets, which also slowed the rise of prices. The season average price strengthened to 22.0 cents per pound compared with a 2001/02-average of 16.5 cents. The high extraction rate and price helped soybean oil to contribute a relatively high share (38 percent) to the total value of crushing. Situation for Other U.S. Oil Crops Cottonseed The harvested acreage of U.S. cotton declined 10 percent in 2002. In addition, adverse weather damaged cotton yields in 2002 throughout the Southeast. Domestic cottonseed output for 2002 dropped 17 percent from the previous year to 6.2 million short tons. North Carolina, Georgia, Alabama, and South Carolina accounted for 57 percent of the reduction in the national cottonseed crop. The seed-to-lint ratio continued a 20-year descent by slipping to 718 pounds per bale. After the previous year’s near-record output, the smaller 2002 cottonseed crop tightened available supplies for processors. In addition, U.S. cottonseed imports were scaled back with a drought-reduced Australian harvest. Domestic crushers also lacked access to supplies because of the unrelenting autumn rains that delayed marketing and damaged quality of the U.S. harvest. The shortfall raised the season average farm price for cottonseed to $100 per ton from $93 in 2001/02. Consequently, cottonseed crushing fell to 2.5 million tons in 2002/03 from 2.8 million in 2001/02. This was the smallest volume of cottonseed crushed in the last century. Not only was there a lower rate of crush, but the extraction rate for cottonseed oil dropped to 294 pounds per ton, among the poorest yields in U.S. history. With these poor fundamentals, domestic cottonseed oil output slumped in 2002/03 to a modern era low of 725 million pounds. By February 2003, the output losses were driving cottonseed oil prices up to nearly 50 cents per pound, more than 3 times higher than a year earlier. The large price premium stifled both domestic and export demand for cottonseed oil, which plummeted to 636 million and 110 million pounds, respectively. Peanuts 2002/03 Peanut Market Highlighted by Policy Change In May 2002, the passage of the Farm Security and Rural Investment Act (2002 Farm Act) substantially overhauled the U.S. peanut program by replacing a marketing quota system with a set of supports similar to those available to producers of other program crops such as grains and cotton. The previous system-- based on marketing quotas and nonrecourse loans--supported domestic prices of peanuts destined for domestic edible consumption (quota peanuts), and required non-quota (' additional' ) peanuts to be exported or crushed. Production for domestic edible consumption was constrained by an annually established marketing quota--set at 1.18 million short tons (2.36 billion pounds) for the 2001/02 crop year. Quota peanuts were eligible for the quota loan rate of $610 per ton (30.5 cents per pound) in 2001/02. Marketings of nonquota (additional) peanut production were permitted only for export or domestic crush, and were eligible for a lower loan rate of $132 per ton (6.6 cents per pound) in 2001/02. Under provisions of the 2002 Farm Act, all producers choosing to grow peanuts are now eligible for marketing assistance loans at a loan rate of $355 per ton (17.75 cents per pound) and face no restrictions on marketing their peanuts for domestic edible consumption. Producers with a history of peanut production are also eligible for direct payments of $36 per ton and counter- cyclical payments tied to a $495 per ton target price. Direct and counter-cyclical payments are both based on historical acres and yields. Historic peanut producers had until March 31, 2003, to assign average peanut base and yield to cropland on a farm in the same or contiguous State. In addition, quota holders were eligible for a peanut quota buyout amounting to $1,100 per ton (55 cents per pound), to be paid out in five annual installments during fiscal years 2002-06, or the outstanding amount taken as a lump sum at any time. 2002 Peanut Production Drops 22 Percent Under the 2002 Farm Act, former quota owners producing peanuts face lower prices and increased competition, whereas non-quota owners and potential entrants would be eligible for increased government support from the marketing assistance loan rate of $355 per ton. At 3,320 million pounds, U.S. production of peanuts in 2002 was down 22 percent from 2001, but slightly above the 2000 crop of 3,266 million pounds. Given the timing of the 2002 Farm Act’s passage in mid-May 2002, it is unclear to what extent the program changes affected planting decisions. However, the outcome was that planted acreage declined 12 percent from 2001 to 1.36 million acres and was the smallest area since 1982. Harvested area totaled 1.30 million acres, down 8 percent from 2001. The U.S. yield averaged 2,561 pounds per harvested acre, down 468 pounds from the record national average yield of 2001. In the largest producing region, the Southeast (Alabama, Florida, Georgia, and South Carolina), planted area of 806,000 acres was down only 1 percent from the previous year, but average yields dropped 702 pounds to 2,433 pounds per acre. That resulted in the Southeast producing 1,909 million pounds of peanuts, 24 percent below the 2001 level. Production from the Virginia-North Carolina area totaled 330 million pounds, down 44 percent from 2001. Planted acres, at 159,000, were down 20 percent from 2001 and the average yield of 2,100 pounds per acre was down 894 pounds from 2001. Southwest peanut producers (New Mexico, Oklahoma, and Texas) planted 25 percent fewer acres in 2002 than the previous year, for a total of 393,000 acres. In contrast to the other producing regions, yields in the tri-state area were strong, averaging 3,047 pounds per acre, 210 pounds above 2001. Production totaled 1.08 billion pounds, down 7 percent from the previous year. Peanut Exports Plunge but Overall Use Relatively Steady Although production in 2002/03 declined by nearly 1 billion pounds from the previous year--and imports dropped 63 percent to 75 million pounds--supplies were bolstered by record beginning stocks of 1,476 million pounds. Overall use remained relatively steady at 3,997 million pounds compared with 4,100 million pounds in 2001/02. Imports, which normally filled the tariff- rate quota level of approximately 57,000 metric tons (shelled basis) fell sharply as a result of lower domestic prices following the passage of the 2002 Farm Act. Domestic food use rose to 2.224 billion pounds, up 13 million pounds (less than 1 percent) from 2001/02, and processors crushed 779 million pounds of peanuts, 88 million pounds more than the previous year and the highest level since 1995/96. The most notable change in use came in the export category, with shipments dropping to 490 million pounds, down 223 million pounds (31 percent) from the previous year and the lowest level since 1975. Despite strong prices in export markets (Rotterdam)--up more than one-third from 2001/02--lower exports partly reflected reduced domestic production, but also the first opportunity since the 1930s for all peanut producers to market their crop for domestic food use without restriction. Although a tighter supply situation in 2002/03 would normally indicate strengthening prices, the elimination of marketing quotas increased the availability of peanuts for domestic food use. The season average farm price in 2002/03 was 18.24 cents per pound, the lowest nominal level since 1974, and down from 23.4 cents per pound in 2001/02. In 2002/03, about 668,000 short tons (1.34 billion pounds) of peanuts were placed under loan, with less than 1,000 tons being forfeited. This indicates that, for most producers, prevailing or anticipated market prices exceeded loan repayment rates (the lower of the marketing loan rate plus interest, or the weekly repayment rate established by USDA). Marketing loan gains amounted to $23.7 million, with an average marketing loan gain of $36.21 per ton. In addition, loan deficiency payments (LDPs) averaging $28.83 per ton were taken on 909,000 tons of peanuts, for a total of $26.2 million in LDP revenue. Based on the season average farm price, the final 2002- crop counter-cyclical payment rate for peanuts was $95 per ton of eligible base production. With the increased crush, U.S. peanut oil production rose to 259 million pounds, up from 230 million pounds the year before. Imports also climbed nearly 90 percent to 73 million pounds, but peanut oil prices still strengthened to 46.7 cents per pound (up 45 percent) because of higher values throughout the vegetable oil complex. Peanut oil exports rose to 44 million pounds in 2002/03, up from 8 million pounds in 2001/02 and the largest since 1995/96. Similarly, peanut meal production increased 29,000 short tons to 177,000. In spite of the larger output, the 2002/03 average price climbed by $20 to $128 per ton along with other protein meal prices. Sunflowerseed U.S. farmers planted 2.58 million acres of sunflowers in 2002, or 73,000 less than the year before. Although the plantings of oil-type sunflowers were up 280,000 acres in North Dakota, that was offset by declines in oil-type and confection sunflower acreage for nearly every other State. Confection-type sunflowers, which tend to have lower yields than oil-type varieties, accounted for 80 percent of the acreage reduction. U.S. sunflowerseed production in 2002 fell more than one-fourth to 2,490 million pounds. Although sunflower planting declined only 2 percent in 2002, harvested acreage fell 15 percent. Most of the severe reduction in output was due to a drought that hit yields very hard. Yields were hurt badly in much of the Central Plains region despite higher production by North Dakota and Minnesota farmers. A widespread pest infestation by the spotted stem weevil also damaged sunflowers. These factors reduced the 2002 national average yield to 1,133 pounds per acre, which was the poorest since 1993. To further complicate matters, the sunflowerseed harvest was also slowed by untimely wet weather. Despite firm foreign demand, U.S. exports of sunflowerseed and products fared poorly in 2002/03 because of a lack of domestic supplies. The season average farm price for sunflowerseed (all types) climbed to 12.2 cents per pound, its highest level in 9 years. A severe 805-million-pound reduction in the oil-type sunflowerseed supply led to domestic processors consuming only 703 million pounds, the least since 1978/79. At the end of December 2002, U.S. stocks of sunflowerseed oil had peaked for the season but were already 40 percent lower than a year earlier. Sunflowerseed oil exports, which dropped by three-fourths to 110 million pounds, bore the brunt of the supply shortage. The loss of foreign markets was most severe for Algeria, Netherlands, Turkey, and Mexico. The tightness maintained a very large (11 cents per pound) price premium for sunflowerseed oil versus soybean oil. That also curtailed domestic consumption to 268 million pounds, down 28 percent from 2001/02. Other Oilseeds U.S. farmers planted 1.46 million acres of canola in 2002, which were 96,000 less than the 2000 record high. Despite a 19,000- acre increase in canola planting, 2002 harvested area fell by 77,000 acres to 1.38 million acres. In North Dakota, which accounts for 91 percent of national acreage, the average canola yield fell to 1,230 pounds per acre versus 1,400 pounds in 2001. The 2002 domestic harvest dropped 22 percent to 1,553 million pounds. Cash market prices for canola seed strengthened to $10.60 per hundredweight. Similarly, a poor Canadian canola crop also restricted availability of imported seed to 434 million pounds. Consequently, the supply shortage scaled back 2002/03 domestic canola seed crushing by 22 percent to 1,291 million pounds. A reduction in the Canadian crush also trimmed U.S. imports of canola oil to 929 million pounds. Therefore, aggregate U.S. canola oil supplies declined nearly 300 million pounds in 2002/03. That hiked up the Midwest average canola oil price from 23.5 cents per pound in 2001/02 to 29.3 cents. The only minor U.S. oilseed that had much of an expansion in acreage for 2002 was flaxseed, for which plantings surged 200,000 acres to 785,000. This was the largest U.S. flaxseed area since 1979, with nearly all of the acreage in North Dakota. U.S. flaxseed production increased to 12.6 million bushels from 11.5 million in 2001. Although flaxseed plantings increased 34 percent, harvested acreage rose just 22 percent and yields fell to a disappointing 17.9 bushels per acre because of poor moisture conditions. Like the previous year, U.S. flaxseed exports benefited from a poor Canadian harvest and increased to a record high 2.9 million bushels. The acreage planted to safflowers nationally rose 16 percent in 2002 to 219,000 acres. A 16-percent increase in acreage and better yields improved 2002 safflowerseed production (to 298 million pounds) by 23 percent from the previous year. However, the crop still fell well short of the average output level during the 1990s. Other Fats and Oils Highlights Corn Oil Domestic consumption of corn oil expanded strongly throughout 2003 as users sought an alternative for the deficit of oils derived from sunflowerseed, canola, and cottonseed. Total disappearance for corn oil in 2002/03 soared from 1,363 million to 1,625 million pounds. However, there was no growth in corn oil production either, which slipped 8 million pounds to 2,453 million. Thus, that stopgap in domestic needs limited the volume of corn oil that could be exported. U.S. corn oil exports dropped to 890 million pounds from 1,172 million in 2001/02. Lower shipments to Turkey, Italy, and Mexico were largely responsible. Prices for corn oil followed the rise in soybean oil prices during the last half of 2002 and averaged 28 cents per pound. Imported Oils Despite a 2-percent decline of world coconut oil production in 2002/03 to 3.17 million metric tons, prices peaked early in 2003 and subsequently declined. The import unit value for coconut oil in fiscal 2003 was $334 per metric ton, down from $361 in fiscal 2002. An 8-percent increase in global output of palm kernel oil (the other major lauric oil) to 3.36 million tons provided the price resistance. U.S. coconut oil imports fell sharply from 1,093 million pounds in 2001/02 to 860 million. However, this was largely offset by a rise in U.S. palm kernel oil imports from 330 million to 470 million pounds. World output of olive oil fell 22 percent in 2002/03 to 2.16 million tons. The reduction in global use was cushioned by a substantial shrinkage of stocks. Therefore, there was a more moderate 7-percent reduction in international olive oil trade to 0.38 million tons. Still, after two decades of strong growth, U.S. olive oil imports registered a marginal 5-million-pound increase in 2002/03 to 485 million pounds. This happened partly because olive oil imports became more costly in 2002/03, with the unit value rising 6 percent to 88 cents per pound. A weakening of the dollar against the euro in 2003 also helped imports become more expensive. Animal Fats Output of edible tallow expanded 7 percent in 2002/03 to 2,075 million pounds. Nearly all of that production increase was domestically consumed. Although exports to Mexico (the leading buyer of U.S. tallow) fell modestly, total shipments increased by 10 million pounds to 485 million based on larger trade with Turkey, Taiwan, and Russia. Edible tallow prices began a strong climb by the fall of 2002. In the spring, prices receded a bit but spiked again in June after a Canadian cow had tested positive for BSE (mad cow disease). Imports of tallow from that country were temporarily banned by most countries. That included the United States, although imports account for a negligible part of the total supply. However, the discovery of no more cases helped to settle the market. The marketing year average for edible tallow prices was 17.5 cents per pound, compared with 13.9 cents in 2001/02. U.S. lard production dipped by 5 million pounds in 2002/03 to 1,075 million. Consequently, total use of lard also changed minimally. Lard exports improved slightly to 105 million pounds, which was offset by an equivalent decline in domestic consumption to 985 million pounds. Like tallow, lard prices benefited from a rally in vegetable oil prices, increasing sharply in 2002/03 to 18.1 cents per pound from 13.6 cents the previous marketing year World Oilseed and Protein Meal Situation South American Exporters Begin Dominance of World Soybean Trade World oilseed production rose to 328.9 million metric tons for 2002/03, from 324.4 million the previous year. The 11.9-million- ton gain in soybean production to 196.4 million tons accounted for most of the oilseed increase. With a cut in U.S. oilseed output, nearly all of the 2002/03 expansion of world oilseed supplies was divided between Brazil and Argentina. Paraguay’s soybean production in 2002/03 also rebounded (to 3.9 million tons) as yields recovered from severe dryness the year before. Accordingly, soybeans and soybean products captured most of the gains in world oilseed trade. For soybean imports, China was responsible for nearly all of the world’s growth in 2002/03. Despite a strong expansion in consumption, year ending global stocks of soybeans surged 16 percent to 37.2 million tons. Brazil had quite strong soybean prices in 2002 because of slow farm sales, less U.S. acreage, and a summer weather rally. The misfortunes for oilseed crops elsewhere in the world also provided a healthy boost to Brazilian soybean values. In addition, doubts about Brazil’s ability to service a large public debt weakened its exchange rate to near a record low, which only magnified the impact on the country’s farm prices. Soybean prices in local currency increased 75-80 percent between March and August 2002. In a repeat of similar circumstances a year earlier, Brazilian farmers got favorable returns on their previous harvest and on forward sales for the new crop. These profits encouraged an expansion of Brazil’s soybean area for 2002/03 by 13 percent to 18.4 million hectares. Most of the Brazilian expansion of soybean area again occurred in the high-yielding Center-West states, including Mato Grosso and Goias. Soybean planting in those states was held up by hot and dry conditions during September and October. But, the arrival of more precipitation in late October renewed planting progress and farmers switched more land from summer corn into soybeans. In southern Brazil, heavy rains stalled the start of planting, although soybean yields there far surpassed the drought-damaged 2001/02 crop. The frequent rains persisted through April and May, which delayed harvesting. Soybean yields were generally excellent throughout Brazil because of good weather and a substantial improvement in farm input use. Consequently, Brazilian soybean production soared to 52.5 million tons in 2002/03, up from 43.5 million the year before. Still, there was some damage to the crop (mainly in Mato Grosso and Bahia) from Asian soybean rust. Originating in East Asia, this wind-borne disease can devastate many species of legumes, including soybeans. Depending on the plant’s stage at infection, the disease can cause catastrophic yield losses if allowed to proliferate without several fungicide applications. At the moment, there are no commercially available soybean varieties with rust tolerance. Initially detected in a few Brazilian farms in 2001, its fungal spores have since been detected throughout the entire country. But, most Brazilian farmers heeded warnings to spray their crops with fungicides. These protective applications successfully limited crop damage in 2003 but also significantly raised farm production costs. In Argentina, a financial crisis in 2002 left farmers with little cash or credit to purchase farm inputs. Like Brazilian soybean producers have done for many years, Argentine farmers managed to acquire inputs by putting up as collateral their unsold old crop stocks and leveraging their new crop potential with suppliers. Plantings of wheat and corn (which have higher input expenses than soybeans) fell sharply as a result. Heavy rains in the southern part of Buenos Aires province stalled grain planting that helped shift even more area toward soybeans. By default, more first-crop soybeans were sown, but a strengthening of soybean prices in 2002 did not make this a difficult decision. Argentine soybean area soared (as in Brazil) by 11 percent to 12.6 million hectares. Despite a shortage of inputs, a record-high Argentine yield was achieved through mostly favorable weather. A spell of hot and dry weather during January stressed crops in southern regions. But, October-December precipitation had been 50 percent above normal and the rain returned in February to ease the heat wave. Productivity was also enhanced by a larger proportion (82 percent) of first-crop soybeans (which tend to yield about 30- percent more than soybeans that are double-cropped following wheat). Argentine soybean production rose to 35.5 million tons in 2002/03 from 30.0 million in 2001/02. Brisk trade by both Brazil and Argentina developed in 2002/03 because of a lag in old crop marketing, record new crops, lower U.S. supplies, and still competitive exchange rates. This was the first year that soybean exports from South America had exceeded U.S. shipments. Brazil’s soybean exports increased sharply from 15.0 million to 21.1 million tons. Likewise, Argentine exporters used their advantages to ship a record 10.1 million tons of soybeans. Most of the export gains by Brazil and Argentina came not from their traditional market in Western Europe, but instead featured the emerging markets in Asia, the Middle East, and North Africa. However, shipments from both countries could have been even larger. By mid-2003, Brazil’s currency had gained to its strongest level against the dollar since July 2002, and the Argentine peso was at a 12-month high. Soybean prices in Brazil plunged after January, yet mid-2003 cash values were still about 30 percent higher than they were a year earlier. Farmers had captured very attractive terms on forward sales made in 2002 and their needs for cash flow were being met by sales of other commodities. Thus, both Brazilian and Argentine producers postponed sales to let prices strengthen prior to the U.S. harvest. That turned out to be a sound strategy when the difficulties for the U.S. crop after spiked prices again in August 2003. South American farmers took advantage of that price windfall to resume old-crop marketing. However, the backlog of stocks from the region carried over was about 18 percent higher than the previous year. Argentina is predominantly an exporter of soybean products and its crushing expanded by 12 percent in 2002/03 to 23.4 million tons. Even with robust gains in both exports and domestic use, Argentina has accrued much larger soybean stocks in recent years. September 2003 ending soybean stocks in Argentina were approximately 11.2 million tons, or double the level just 3 years earlier. The financial crisis made soybean stocks a far more secure store of value for farmers than any bank account. Formerly, there had always been a constraint on Argentine grain storage that forced producers to accept lower prices for newly harvested crops. Now, however, Argentine farmers can exploit better pricing opportunities by their use of relatively inexpensive plastic storage bags for soybeans. With elimination of the peso’s peg to the dollar in early 2002, their ability to hedge against unpredictable economic and political events has become even more valuable. China’s Soybean Imports Surge Following Trade Disruptions Unlike the previous season, China did not head into 2002/03 with a large cushion of oilseed stocks. These stocks had allowed China to maintain consumption during a stoppage of soybean imports in early 2002, but the carryover was quickly reduced to mere pipeline supplies. Domestic crops of soybeans, peanuts, and sunflowerseed increased minimally in 2002 and could not materially ease a growing supply deficit. In spite of efforts by China’s Government to encourage domestic soybean production, most of the country’s farmers have responded more to revenues from their last crop than from planting-time prices. Farmers in China had already sold the 2001 soybean crop before the spring 2002 price rally. Because corn planting was more attractive, the 2002 soybean area declined 8 percent to 8.7 million hectares. With a return of more favorable weather to the main growing region in northeastern China, improved yields lifted 2002 production to 16.5 million tons from 15.4 million. Another key factor for the robust soybean imports by China was a lack of rapeseed supplies to crush. The domestic rapeseed harvest was disappointing and poor harvests by Canada and Australia depressed rapeseed imports. Soybean purchases by China accelerated rapidly during 2002/03 because there was still rebuilding of supplies drawn down previously by a shutdown of imports. Importers were also likely expanding their soybean stocks prior to December 20 when China’s safety certificate regime was to take effect. Importers are still obtaining provisional safety certificates issued by the Ministry of Agriculture that are based on assessments of the biotech crops by foreign governments. After December 20, China’s Government was to issue safety certificates for biotech crops based on its own field trials. Yet, there was uncertainty about how long China’s approval process would take. The interim policy allowed just 30 days for approvals, but after December 20 the new policy was to extend the approval period up to 270 working days. Thus, importers were being prompted to secure stocks to postpone the same kind of shortages experienced in prior months. Shortly before the December 2002 deadline, China’s agriculture ministry extended its interim rules through September 2003 but was recognizing only safety certificates from the country of origin, not third countries. Soybean exporters from the United States and Argentina (which have both officially approved biotech varieties) were able to obtain certificates from China. But, Brazil had not sanctioned production of such crops at that time and had no documented safety claims for them. The Brazilian Government would later agree with China on a protocol for its supplies that were grown illegally and that ended up in export shipments. Temporarily unimpeded by any disruptions from regulations on biotech imports, China bought soybeans at a rapid pace between March and early September. Switching between U.S. and South American origins began by late spring. Speculative buying had accelerated in the spring because China’s Government had made no official announcement on an extension of interim policies for biotech imports beyond the September 20 expiration. Also, the Ministry of Agriculture had not been accepting safety certificate applications for forward purchases. Bookings slowed in the summer because of the uncertainty of taking delivery before the September 20 deadline. Citing phytosanitary problems, the Government of China’s inspection bureau stepped up its scrutiny of the quality of soybean imports. Difficulties in obtaining inspection permits caused a number of stranded cargoes at Chinese ports. Without these permits from the government’s Administration of Quality, Supervision, Inspection, and Quarantine, ships cannot discharge any biotech soybeans at ports. Most of the stranded cargoes were from Brazil, as U.S. soybean exports to China had already come to a seasonal end. Yet, crushers in China were generally able to secure soybean imports better than they did in 2001/02 because of the extension of the transition period for its import regulations on biotech crops. China’s soybean imports soared to 20.3 million tons for 2002/03 from 10.4 million in 2001/02. This was the first year that China’s soybean imports exceeded domestic production. Despite disruptions in the inspection process, the late surge of shipments had approximately doubled China’s soybean stocks from the previous year’s carryout. Higher Prices Moderate Global Soybean Meal Demand Consumption of soybean meal grew solidly in 2002/03 throughout Asia, the Middle East, Eastern Europe, Mexico, and Russia. In contrast, there was limited demand growth for the three markets (the United States, EU, and Japan) that account for about half of world soybean meal consumption. Global soybean meal exports for 2002/03 increased 1.5 million tons for 2002/03 to 43.8 million, with South American suppliers accounting for all of the increase. Greater crushing boosted soybean meal exports from Argentina to 18.2 million tons from 16.1 million in 2001/02. The rise in Brazilian soybean meal exports (from 12.0 million to 13.8 million tons) was more moderate because of strong competition from Argentina and rapidly expanding consumption by domestic livestock. Conversely, India had a production shortfall for both soybeans and peanuts in 2002. Indian crushers had trouble obtaining soybeans from farmers at a price that could guarantee a profit. To compensate for lost peanut meal production, India also needed to consume more of its own soybean meal for its rapidly growing poultry sector. This further cut into India’s 2002/03 soybean meal exports, which were nearly halved to 1.3 million tons. Although China is a relative newcomer to the world export market for soybean meal, it remained an active participant again in 2002/03. China has many relatively new coastal processing plants that are well situated to crush imported soybeans into meal for either domestic users or for re-export to nearby Asian buyers. While exports by China’s processors declined from 1.05 million to 0.8 million tons, they benefited from the decline in Indian soybean meal shipments. In May, Japan temporarily banned imports of poultry from China after authorities detected the avian influenza virus in a shipment of duck products. This highly infectious disease can inflict serious economic damage on a country’s poultry producers. Domestic meat demand in China was also being subdued by the deadly virus causing Severe Acute Respiratory Syndrome (SARS), which for months ruined tourism and minimized visits to public places such as restaurants and food markets. In spite of any proof, some consumers also feared that they could contract the disease by eating poultry. That far into the marketing year, China’s soybean meal consumption was only marginally affected, which increased nearly 30 percent from 2001/02 to 19.7 million tons. Demand for soybean meal was also growing strongly in other Asian countries. China’s exclusion from the Japanese poultry market provided a windfall to other exporting nations, particularly Thailand. The rapid expansion of Thailand’s poultry sector raised its soybean imports in 2002/03 by 15 percent to 1.8 million tons while soybean meal imports rose 4 percent to 1.9 million. In Latin America, Brazil and Mexico accounted for nearly all of the region’s growth in soybean meal consumption. Mexico imported nearly two-thirds more soybean meal, but as much of its supply increase came from crushing soybeans that were imported. Brazil relied entirely on its own vast output to fulfill its 2002/03 domestic meal requirements, which grew 4 percent to 8.3 million tons. In Europe, the euro had strengthened by early 2003 to around 1.1 euros to the dollar compared with 0.86 per dollar in February 2002. The boost to European Union (EU) purchasing power supported imports of soybeans and soybean meal. Lower soybean area within the EU also cut the domestic crop by 0.2 million tons. But, in spite of these factors, a record-large wheat supply led to a slowing of EU soybean meal consumption. Excessive rains (particularly in Germany) in 2002 harmed the milling quality of EU wheat that forced a larger consumption of it as feed. Consequently, greater substitution of higher protein wheat for barley and corn dampened supplementary needs for soybean meal. European Union crush margins were also put under greater pressure by strong bidding for soybeans by China and a rising tide of South American soybean meal. Likewise, expanded crushing capacity throughout North Africa and the Middle East were also cutting into EU exports of soybean meal and soybean oil. In addition, Russia approved (for 9 months beginning in April 2003) new quotas on meat and poultry imports. The Russian trade restrictions curbed feed consumption by primarily European exporters of livestock products. European Union soybean imports for 2002/03 (excluding intra-trade) slipped to 17.6 million tons from 18.3 million. But with the weak consumption gains, EU soybean meal imports increased by a meager 0.2 million tons to 19.7 million. Adverse Weather Curtails World Rapeseed Trade Poor weather for some major rapeseed growing countries in 2002/03 aborted a recovery in world production of the crop. In fact, 2002/03 rapeseed output dropped even further to 32.3 million tons (from 36.0 million in 2001/02) and was the smallest in the previous 6 years. In the Canadian prairies, spring moisture conditions still had not recovered from the 2001 drought and canola plantings were up just 2 percent. Drought worsened throughout the summer, particularly in central Saskatchewan. Heavy rains came to the southeastern Prairie region in late August, but they were too late to help yields and added damage to the crop’s quality. Abandonment of canola acreage and drought-damaged yields slashed the Canadian harvest to 4.2 million tons. The crop was even worse than the drought-reduced 2001 crop of 4.9 million tons. It was Canada’s smallest crop since 1990, when harvested area that year was more than one-fourth less than in 2002. Consequently, Winnipeg canola prices surged 25 percent between May and August and have since remained high. The severe crop losses rationed Canadian exports and domestic crushing. Canadian exports of canola slumped to 2.4 million tons, the least in 11 years. A labor dispute at the major western Canadian ports last fall also impeded loading of rapeseed shipments to Asia. Carryout stocks shrank to 0.9 million tons. Since early 2002, Australia was gripped by one of that country’s worst droughts in a century, which reduced the sown rapeseed area sharply and slashed yields. Australian rapeseed production plunged to 0.6 million tons from 1.8 million. Typically about three-fourths of Australia’s rapeseed production is exported, so the poor crop nearly halved Australian 2002/03 exports to 0.4 million tons. Together, Canada and Australia normally account for 50-60 percent of world rapeseed exports. Producers from the EU were some of the few that increased their rapeseed output in 2002, up to 9.3 million tons from 8.8 million in 2001. Most of the area expansion occurred in Germany, which is rapidly growing its biodiesel industry. There were better yields in 2002 but, like the year before, heavy rains damaged the German crop in early August just as the pods were ready for harvest. In satisfying the biodiesel market, it meant that the vegetable oil supplies available for food use in the EU would remain tight through 2002/03. Trade with Eastern European countries, which had smaller rapeseed harvests of their own, could not help ease EU oilseed requirements. Consequently, EU rapeseed imports declined from 0.9 million to 0.6 million tons. As a result of crop shortfalls for the major producing countries, world rapeseed imports fell from 5.6 million tons in 2001/02 to 4.4 million. Japan secured its normal supply, so the short crops exacerbated supply availability for other major importers, primarily China and Mexico. China had prospects for another bumper rapeseed crop in 2002 with a record sown area. However, spring flooding in central China damaged the crop, which fell to 10.6 million tons from 11.3 million in 2001. But foreign shortages curtailed China’s rapeseed imports to just 150,000 tons from 775,000 in 2001/02 and 2.4 million in 2000/01. For Mexico (the second-ranked importing country last year), the worldwide rapeseed shortage cut its imports nearly in half to 0.5 million tons. Global sunflowerseed output recovered to 24.0 million tons in 2002 from the poor yields that depressed 2001 production to 21.4 million. Most of the output gains were by countries that process the seed mainly for their own domestic use. Therefore, there was only a modest increase in international sunflowerseed trade from 1.8 million to 2.3 million tons. Russian sunflower area was modestly higher in 2002 because of relatively attractive prices following the poor 2001 crop. Even so, area harvested was down from sowings in 1999 and 2000 because a 20-percent Russian export tax continues to dampen farm returns. Compared with last year’s drought, Russia had ample rains in August 2002 during the main flowering period. Similarly, Ukraine sunflower area expanded 14 percent to 2.7 million hectares. Ukraine sunflowerseed yields also improved, raising the country’s 2002 production by 45 percent to a record 3.3 million tons. As both countries have maintained export tax policies intended to retain crops for their domestic crushing industries, it lessens the seed available for export to the rest of Europe. Better yields and larger area also boosted output in Turkey and eastern Europe. In contrast, the EU sunflowerseed crop was lower, although yields had also improved there. Because of continued erosion in its profitability in Italy, France, and Spain, EU sunflowerseed production declined 9 percent to 2.8 million largely from a 13-percent drop in harvested area. Improved foreign harvests did allow EU sunflowerseed imports to rebound to 1.7 million tons, however. In Argentina, sunflowerseed is a cheaper crop to grow than corn, so the financial crisis expanded its area to 2.35 million hectares. However, high temperatures during flowering cut yields in the southern part of Buenos Aires province. This trimmed Argentine output to 3.7 million tons and stalled any growth in demand. Poor prices for cotton in 2002 cut cultivated area throughout the world. Smaller crops, particularly in the United States and China, reduced 2002/03 world cottonseed output to 32.8 million tons from 36.6 million in 2001/02. Indian cotton area also fell, but improved yields stabilized that country’s cottonseed output at 4.4 million tons. World peanut production dropped 9 percent for 2002/03 to 30.6 million tons largely because of severe droughts in India, Senegal, and the United States. In India, rainfall during August 2002 provided some relief for its soybean crop, although the western and southern regions that grow peanuts were not as fortunate. The failure of the summer monsoon to reach these areas prevented an expansion of peanut area planted and stressed yields on the land where it was sown. Indian peanut production was cut to 5.2 million tons compared with last year’s harvest of 7.6 million. Smaller crops in both India and Senegal sharply scaled back crushing and production of peanut oil. Senegal forfeited a lot of its capability to export peanut oil, but India lost more of its primary source for domestic oil consumption. In contrast, peanut production in China improved to 14.9 million tons in 2002. World Vegetable Oil Situation Global vegetable oil production increased 1.9 million tons for 2002/03 to 94.3 million tons. Of that total gain, palm oil accounted for 97 percent. Steady demand supported world palm oil exports to about 19.1 million tons for 2002/03, which was double the volume of soybean oil trade. Although trailing the growth of palm oil, global exports of soybean oil also experienced solid gains in 2002/03. Argentine soybean oil exports surged 18 percent to 4.4 million tons. Brazil, (the second-ranked exporter of soybean oil) shipped 2.25 million tons in 2002/03, up 27 percent. With a big drawdown of stocks, U.S. exports of soybean oil were also able to persevere. Most of the growth in global soybean oil imports was due to China and India. Tighter Supplies of Competing Oils Boost Global Soybean Oil Trade Global palm oil output grew moderately for 2002/03, rising 7 percent to 27.2 million tons. Most of the annual gain was divided between Malaysia (from 11.9 million to 13.2 million tons) and Indonesia (from 9.2 million to 9.7 million tons). Malaysian production grew quite strongly between April and September 2003 due to seasonal factors, favorable rainfall, and improved input use. However, steady consumption trimmed ending stocks of palm oil to their lowest level since 1998. Palm oil exports by Malaysia grew to 11.6 million tons from 10.5 million in 2001/02. Similarly, Indonesian exports increased by 5 percent to nearly 6 million tons. After a nearly 2-year climb, Malaysian prices for RBD palm oil peaked around $450 per ton in January 2003. The price fell back to an August average of $406 per ton yet was still $30 higher than it was a year earlier. Poor Indian Monsoon Accelerates Vegetable Oil Imports In India, oilseed crops were damaged by a widespread dry spell. Total Indian oilseed production in 2002/03 declined by 5.2 million tons to 18.8 million. It is not feasible to import oilseeds for crushing in India, so the smaller domestic crops slashed domestic vegetable oil output by nearly 20 percent to 4.4 million tons. While an initial rainy period in early June 2002 helped usher in the summer monsoon on schedule, its progression into the country weakened before all soybeans could be sown. Modest relief from rains in mid-July allowed a few late plantings, but the poor overall moisture condition still left the soybean area 5 percent lower at 5.7 million hectares. Precipitation from the monsoon was 30-40 percent below normal in most of the oilseed-producing regions. With a lower sown area and yields, the 2002 soybean crop dropped to 4.0 million tons from 5.4 million for 2001. Other Indian summer oilseed crops were also hurt by too little moisture. Of greater consequence to India’s huge vegetable oil market were the yield losses that cut domestic peanut production to 5.2 million tons from 7.6 million in 2001. Likewise, lower cotton area and yields reduced cottonseed output to 4.4 million tons compared with 5.1 million last year. Indian production of rapeseed (a winter crop) declined to 3.6 million tons from 4.5 million in 2001/02. The dry conditions persisted through November 2002 when rapeseed was being sown, resulting in a 9- percent reduction in its crop area. Because of its chronic deficit in oilseeds production, India is by far the world’s major import market for both palm oil and soybean oil. The country gets more than half of its total vegetable oil consumption from foreign imports. Indian vegetable oil imports typically peak from June-September as domestic output wanes and festivals boost seasonal consumption. For 2002/03, Indian palm oil imports rose to 3.95 million from 3.4 million while soybean oil imports increased marginally to 1.6 million tons. Yet, vegetable oil imports were only able to partially replace (and not supplement) the loss of domestic output in 2002/03. The much higher prices trimmed Indian consumption of all oils by 1 percent, a stark contrast with the rapid consumption gains of the late 1990s. Soybean oil imports surged after the Indian Government’s new budget in March 2003 failed to reduce import duties on palm oil as anticipated. That kept in place a comparatively favorable lower bound tariff for imports of crude soybean oil at 45 percent. Despite this advantage, the Government has countered it by its setting of a reference price for crude soybean oil imports. This price becomes the basis for calculation of the ad valorem import tariff. The measure was designed to avoid tariff losses caused by importers under-reporting the import price level. However, the reference price for soybean oil was set considerably higher than actual price quotes, raising the effective tariff above its basic rate of 45 percent. So, although India had imposed a higher basic tariff rate of 65 percent on crude palm oil, its considerably lower reference price evened the competition with soybean oil. The Indian reference price for crude soybean oil was raised to $542 per metric ton in September 2002 and to $600 by December. A hike in the reference prices for crude palm oil and refined palm olein (to $432 and $470 per ton, respectively) was delayed until November. By May 2003, a tight domestic oil supply led the government to lower the duty rates on imports for refined palm oil and palm olein as well as the reference import prices for crude soybean oil (to $537) and crude palm oil (to $390). Regulations requiring a minimum percentage of the more expensive domestic oils in blended oil products were also eased. However, for the year reference prices were generally higher, which contributed to stronger interior prices in the country that suppressed consumption. China had a disappointing 2002 rapeseed harvest. Unlike India, China was willing to import a massive amount of oilseeds to meet its vegetable oil needs. The country would have been a very good import market for rapeseed in 2002/03 except for production shortfalls by Canada and Australia. Thus, Chinese output of rapeseed oil failed to keep up with demand growth. That encouraged a strong resumption of China’s soybean imports after mid-2002. Domestic soybean crushing still provided most of the country’s protein meal requirements. But, despite the surge in soybean crushing, the comparatively low yield of oil left a tight balance for total vegetable oils. To avoid a domestic glut of soybean meal, China’s vegetable oil deficit required a supplement of oil imports. Vegetable oil prices climbed steadily in China during 2003. The SARS crisis spurred many Chinese consumers to expand their at- home stocks of bottled cooking oil. A bureaucratic backlog for the documents to unload soybeans during the summer may have also prompted more orders for soybean oil. As a result, China’s palm oil imports rose to a record 2.5 million tons in 2002/03, while soybean oil imports expanded to 1.5 million tons. Mexican imports of soybean oil (nearly all from the United States) increased to 198,000 tons to make up for the inaccessibility of rapeseed and cottonseed supplies to crush. For Russia, a bumper sunflowerseed harvest lessened that country’s 2002/03 imports of soybean oil and palm oil. Russian imports of both oils had surged in 2001/02 because of a large drop in domestic oil production. 1 1