Weekly Highlights (6 June – 12 June)

Section I: Weekly Highlight on Fundamentals

Global prices are expected to ease only gradually in 2012/13 under the lead of soybeans – if the expected large crops materialize
In the season 2011/12 prices of soybeans and rapeseed have established new highs and also the other major commodities of our field have remained sharply above the most recent five-year averages. The price strength prevailing in the oilseed sector during the past 12 months clearly mirrored the large oilseed production deficit in 2011/12, primarily in soybeans. However, the effect of high prices in 2011/12 on oilseed production in 2012/13 will partly be mitigated by unfavourable weather conditions, which have already hurt the European rapeseed production potential severely. Furthermore, oilseeds continue to face stiff competition for acreage from grains, limiting the uptrend of soybean plantings in the US, which were nearing completion this week

This year the prices of soybeans & products will probably be extremely sensitive to any changes in US production prospects, particularly if yields are jeopardized by dryness this summer. The world market dependence on US soybeans & products will be unusually high in September/February 2012/13 as South American stocks will be severely decimated by that time as a result of this year’s crop failures and relatively high disposals so far this year.

Palm oil production forecast to be higher in 2012 at 54 million MT

Oil World reports that production prospects have improved for the 2nd half of 2012 and for at least Jan/June 2013. Following a below-average year on year growth in Jan/Jun 2012, we forecast world palm oil production to rise by 4% from a year ago in Jul/Sep and by 6% in Oct/Dec 2012. For Oct/Sept 2012/13 Oil World forecast world palm oil production to rise by 6.6% on the year. This is likely to occur mainly in Indonesia and Malaysia, as more planted areas are expected to mature hence more harvesting is expected.

The weakness of palm oil prices in May/early June will probably be reversed soon as the period of below normal production and tight stocks prevailing so far this year is not over yet. The slowdown of production curbed the discount of palm oil vis-a-vis soya oil in Rotterdam to US$129 on the average of April 2012, but in July/May 2011/12 it was above average at US$182, still reflecting the large palm oil production growth in 2011. The latter also explains why average palm oil prices were marginally lower than a year ago in July/May 2011/12 although crude mineral oil rallied by about 18%. Palm oil’s own fundamentals have thus led to an adjustment of the price differential versus energy. Still, palm oil and to a smaller extent also the other vegetable oils are and will from time to time continue to be followers of the broad price direction provided by crude mineral oil. The premiums of palm oil vis-a-vis crude mineral oil stayed sufficiently high throughout most of 2011 to enforce a massive reduction of palm oil usage in the energy sector, primarily in Europe. Energy prices will be a major determinant for vegetable oil prices also in 2012/13. In its World Economic Outlook (April 2012) the IMF assumes only a slight decline of crude mineral oil prices to US-$110 per barrel in 2012/13, which limits also the downward potential for palm oil and other vegetable oils. However, Brent crude oil prices declined to a 5-month low of US-$96 per barrel in early June, pressured by pessimistic economic expectations.

Oil World anticipates the growth of palm oil production to rise from this season’s 2.4 to approximately 3.4 Mn T in Oct/Sept 2012/13 and expect the discount of palm oil vis-a-vis soya oil to widen from current levels to about US$160- 180 as registered on the average of the past five years.

Section II: Other Weekly Highlights

1. Asia Pacific

China: 5.28 million tonnes of soybean arrived in May

China Customs declaimed that China purchased 5.28 million tonnes of soybean which is up by 16% from a year earlier and increased by 8% against last month. It was reported some Chinese importers had cancelled several shipment in the subjected months. Although the Euro Debt Crisis caused increasing concerns on China’s economy slowdown, domestic demands on the oilseeds was still strong.

From January to May this year, soybean arrival reached 23.43 million tonnes and boosted by 20.7% from a year earlier. National Grains and Oils Intelligence Center estimated soybean imports at 6.00 million tonnes in June.

China may begin importing corn from Argentina as demand soars

China, the world’s second-largest corn consumer, may soon start importing Argentine corn, which has been barred because some genetically modified varieties are yet to be approved by Beijing. Given China’s rising demand for corn, agricultural analysts said this could help the country diversify its corn supply and reduce its reliance on supplies from the United States.

China signed an agreement with Argentina on corn imports in February and the pact was expected to take effect on April 20. But some varieties of genetically modified crops, popular among South American farmers, are prohibited by China and therefore blocked from the Chinese market. During the first four months of this year, corn imports stood at 1.76 million tons, more than the total amount last year, according to the General Administration of Customs. Most of China’s corn imports now come from the US.

Chinese industry analysts estimate the country’s corn imports this year will be between 3 million and 4 million tons, while the US Department of Agriculture set its forecast at 6 million tons in a report released earlier this month.

2. Sub Continent

Pakistan: Reduced prices of palm oil lead to reduction in prices of oil and ghee
The post-budget decline of up to Rs 4 per kilogramme (kg) in prices of cooking oil and ghee in the wholesale and retail markets has provided immense financial relief to a large segment of the population which was already reeling under the never-ending spell of rise in prices of essential commodities. Previously, prices of different brands of ghee and cooking oil stood at around Rs 190 per kg to Rs 200 per kg in the open market making it virtually impossible for the less affluent segment of the population to make their desired purchase of both items as per their daily kitchen requirements.

With the declining trend of palm oil prices in the international market as witnessed during the last fortnight and recent announcement by the Federal Finance Minister during the unveiling of the annual budget for the next fiscal year 2012-13 to abolish sales tax and bring down ratio of federal taxes on ghee and cooking had salutary impact on their prices witnessed during the last few days in the retail market.

Some leading retailers of ghee and cooking oil informed their rates have gone down with a ratio of Rs 4 per kg and Rs 3.50 per kg, respectively during the last many days spelling immense financial relief to the general consumers.

3. Americas

USA: Decreasing US exports to China

The American Soybean Association (ASA) expects China to import less soybeans from the United States in 2012, due to Chinese government measures last year to contain the country’s inflation rate. SWS Research Co Ltd estimates a reduction of 1 million tons of soybeans from the release of State reserves in 2011. China’s large imports of Brazilian beans last fall will further minimize imports from the United States. China is the largest overseas market for U.S. soybean farmers, where produce contributed to half of the 52.6 million metric tons of soybeans imported into the Asian giant in 2011. To ease the transition of soy dependency from the U.S., a trade delegation consisting of major Chinese State-owned food companies signed a contract to buy 13.4 million tons of U.S. soybeans in February 2012.

Argentina-Brazil: Brazil expansion enriches Argentinean company revenue

One of Argentina’s largest grains producers, Los Grobo, anticipates a sales rising of 30% over the next crop year. Estimated revenue is placed between $1.4 billion to 1.5 billion in the 2012/2013 agricultural campaign, compared with $1.1 billion projected for the current 2011/2012 season. This increase is due to profitable growth from operations in neighbouring Brazil. Los Grobos is the agro-food production and exports subsidiary of family-run Grobocopatel, one of the leading businesses in Argentina. Headquartered in Buenos Aires province, Los Grobos is the country’s largest producer of wheat and second in soybean.

An annual inflation reaching 25%, intensifying operational and transportation cost, fertilizer import tariffs, land rentals, tax rates, and a depreciating currency, instigate the Argentinean company to expand into Brazil. Los Grobo has designs to expand cultivation in Brazil to 90,000 hectares in 2012/2013 from 60,000 hectares presently. In return, cultivation in the Pampas province area will fall next season to 50,000 hectares from 80,000 hectares. Los Grobo also has operations in Paraguay and Uruguay. The Pampas farm belt yields were slashed by a six-week drought just as soy and corn crops were flowering in December and January. Heavy rains in May also flooded, further cutting harvest prospects. Grobocopatel assessed Argentinean soy production will curtail down by 40 million tonnes while corn harvest will reduce by 30 to 35%.

4. Africa

Ghana: Major investments and improvements for Norpalm Ghana

The Norpalm plantation, which spans 4,500 hectares, is one of the oldest palm estates in Ghana. Operations commenced in the 1960s and the plantation was owned by the state until 2000, when it was divested and sold to Norpalm Ghana Ltd (NGL). After taking control of the plantation in 2000, Norpalm Ghana has focused on increasing the quality and efficiency of its palm oil production processes. Norpalm Ghana is involved in the production of palm fruits which are the processed into palm oil. The company grows 30 to 35 percent of its raw material (palm fruits) and the remainder is bought from local farmers and out growers. NGL currently sells all of the palm oil it produces to PZ Cussons Ghana Limited, a major soap manufacturer responsible for brands such as Imperial Leather and Duck bar soap.

PZ is one of Norpalm Ghana’s strategic partners and shareholders, owning 31 per cent of the company. The remaining 69 per cent is held by Norpalm AS, which is based in Kristiansand, Norway. Norpalm Ghana currently has an operating capacity of 35 metric tonnes per hour, but within the next three years. The company would also like to increase its plantation size by acquiring more land for cultivation, but it faces enormous challenges in the area of land acquisition.

Ivory Coast :Sifca looks to Central Africa

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Ivory Coast agro-industry group Sifca is looking to set up rubber and palm oil plantations in central Africa to boost output and is also eyeing rice production at home, the company’s chairman said on Friday. Sifca, one of the biggest companies in the West African country, is part-owned by Singapore’s Olam International and Wilmar International. Sifca produces palm oil, cotton seed oil, natural rubber and sugar in the West African countries of Ivory Coast, Liberia, Nigeria and Ghana. Chairman Jean-Louis Billon told Reuters on the sidelines of the World Economic Forum in Addis Ababa. “It’s a question of land and finding the right partners.” Sifca has a refinery in Abidjan with installed capacity of 500,000 metric tonnes a year and it is the largest in Africa. “Our objective is to reach full capacity, and then go beyond.” Billon said while Sifca was focusing on its core businesses of natural rubber, palm oil and sugar, it was also looking to grow rice in Ivory Coast to help the country meet its needs. In terms of food security, it’s important that several players get into this area in a large scale,” he said.

Section III: Weekly Data

Palm Oil Prices

• Average CPO prices traded lower this week by RM54.40 to RM2,977.70 against RM3,032.10 attained the previous week. Malaysian palm oil futures closed lower on Tuesday, as renewed fears over the euro zone debt crisis weighed on investor sentiment and the broader financial markets, although losses were limited by lower palm oil stocks. Palm oil, along with other commodities such as crude oil and soybean oil, gained on Monday on news that euro zone finance ministers approved a $125 billion rescue package for struggling Spanish banks.
• Uncertainty over Europe’s debt crisis comes as investors focus on the Greek elections on June 17 that could lead to the nation’s exit from the currency bloc.”A key factor contributing to the price downtrend is the renewed euro zone debt crisis and uncertain global economic outlook, which have dampened sentiments as well as raising the prospect of lower demand for commodities, including vegetable oils,” said Malaysia’s Affin Investment Bank in a research note.
• Malaysian palm oil stocks were at a 13-month low in May, and that has helped cut some losses while palm oil exports for the first 10 days of June fell 6.6 percent, said cargo surveyor Intertek Testing Services, going against market expectations of a stronger demand ahead of the Muslim fasting month starting in mid-July. Another cargo surveyor Societe Generale de Surveillance reported a slight 1.8 percent.
• Traders are eyeing a supply-demand report from the U.S. Department of Agriculture (USDA) due later in the day that could show tighter soybean supply and lend support to palm oil while industry players are also watching for any volatility in price movement as this is the first time that the report will be released during active Chicago futures trading.
• Brent crude prices fell below $98 a barrel on Tuesday, extending losses due to fears that the euro zone debt crisis will worsen and hurt the global economy, threatening growth in oil demand.

2. International Prices

• Average Crude Palm Oil price (cif Rott) traded lower by US$11 from US$1,012 to US$1,001. CPO discount vis-à-vis SBO increased by US$23 to US$174 this week compared to US$151 the previous week.
• With the exception of SBO and SFO which recorede marginal price increases, all other oils recorded lower weekly average prices.
• The U.S. Department of Agriculture made a slight downward revision in its outlook for soybean ending stocks for both old- and new-crop marketing years, providing support for palm oil prices.
• “In addition, supply shortage due to the tree stress effect (in Malaysia) and monetary easing policy from China should continue to support crude palm oil prices,” Alan Lim, research analyst with Malaysia’s Kenanga Investment Bank, said in reference to weak production growth.
• There is positive development in Argentina where conflict between the government and farmers is reportedly to be ending as the decision made by four major farm unions to terminate their strike.