Synopsis - Nirmal

November 1, 2010

1 www.nirmalbang.com

Synopsis:

• The La Nina effect on South American crop.

• Rape seed and Sun seed crop -A concern. Reduced Rape seed crop and crush.

Sun seed crop at three year low.

• Combined supplies of Rape oil and Sun oil to decline by 1.46 million tons.

• World Biodiesel output on the rise. US' soy oil usage for methyl ester to

revive.

• South America's increasing usage of Soy oil for Biodiesel leading to lower

exports of Soy oil.

• Argentina's domestic consumption of Biodiesel to double for the year 2011.

• EU's gap between production and demand of Edible oils to widen.

• China's edible oil imports to cross 10 million tons mark.

• Imminent Biodiesel demand by EU, Brazil, Argentina and the US.

• India's Edible oil imports to rise further despite of revival in domestic pro-

duction of Edible oils.

• World incremental demand-supply deficit to widen further.

• Trimming edible oil carry forward stocks and declining edible oil stocks to

usage ratio.

• Big Acreage battle brewing for 2011/2012.

Factors that may pose risk to our view:

• Any downside of 10-15% in crude oil prices is likely to fuel a similar down-

side inedible oil prices.

• Globally most of the agriculture commodities have been rallying mainly on

weather concerns and apart from demand and supply dynamic, weakness in

dollar due to expectation of quantitative easing and stimulus package in United

States has played very important role in this rally. We believe that markets

are discounting quantitative easing well in advance and moving up, but if

stimulus package is less than market expectation (i.e. $1 trillion) than we may

see a bout of profit taking in commodities and in that case even oilseeds

shouldn't remain exception.

Outlook: The outlook for edible oils remains bullish. We expect edible

oil prices to rally further tracking weather concerns in South America

caused by La Nina. At the same time we expect soybeans to come out as

the biggest loser as far as the acreage battle for the year 2010/2011 is

concerned. We expect tightness in world edible oil stocks and we believe

the upside in edible oil prices is here to stay. A correction or a profit

taking of a percent or two cannot be ruled at these levels. One can wait the

price to cool off from current levels and then initiate fresh buying posi-

tions in edible oil futures.

Price forecasts

BMD CPO RM 3250-3375/tonne

CBOT Soy oil 54.25-57.45 centes/ lbs

NCDEX Soy oil Rs. 580-605-632/

10kgs

MCX CPO Rs. 485-507-523/ 10kgs

ACE Soy oil Rs. 580-605-632/ 10kgs

Time frame: 9-12 months

November 1, 2010


Edible oil prices were seen in limelight during last couple of months mainly

because we saw some smart gains posted by all the major edible oil traded. Soybean

oil was seen posting a 2 year on CBOT after trading in a very thin range since last

almost 2-2.5 years. Palm oil too was seen breaching its previous highs of Ringgit

2799 in May 2009 and posted a fresh new high of Ringgit 3070 in October 2009.

This was possible mainly because of couple of good reasons, but the crux of this

entire sudden rise in edible oil prices was one major factor i.e. weather.

The million dollar question from here on which is bothering everybody's minds

these days is whether the ongoing rally is likely to continue or not. We believe

that edible oil prices have got a long to go, and as far as the ongoing rally is

concerned. Various factors which make us believe that the rally in edible oil

prices is likely to continue are discussed in detail below. but still all an all the

main trigger for upside in Edible oil prices still remains the ongoing La Nina in

the western part of the world.

Last year South America alone added additional 32 million tons of soybean to

world soybean balance sheet. We had witnessed a tsunami of soybeans especially

from the Southern hemisphere of the world. This year there is great speculation

lingering around about how South America's soybean production is likely to be

with huge weather problems faced due to ongoing La Nina.

As of now the weather has been quite reasonable with respect to the sowing

process in case of Argentina. The soil moisture has improved quite a lot in the

key soybean producing state due the recent showers witnessed in Sept/Oct. But

in case of Brazil, its largest Soybean producing state Mato Grosso is experiencing

very hot and dry weather. Such a situation has led to great delays in sowing of

soybean. Moreover the rains in other state such as Parana, Rio Dul is not that

adequate to fulfill the crops growing requirement.

As per our estimates we do not expect the weather to remain favorable even

during the growth stage of the crop. We believe that this year's soybean yield in

South America will eventually turn out to be lower as compared to that of last

year. Thus we expect South America soybean crop to decline by 8-10% from

previous year.

Story So far

The La Nina effect on South

American Soybean crop

November 1, 2010


Soybean output in South America (million tons)

2007 2008 2009 2010 2011F

Brazil 58.73 60.02 57.17 68.69 62-63

Argentina 48.30 46.20 31.50 54.70 48-48.50

Paraguay 5.86 6.12 4.15 7.48 6.50-6.70

Bolivia 1.60 1.48 1.46 1.68 1.65

Uruguay 0.82 0.90 1.17 1.94 1.77

Total 115.31 114.72 95.45 134.49 119.92-121.62

Source : USDA, Oil World, NB Research

Rapeseed S&D’s (million tons)

2006/07 2007/08 2008/09 2009/10E 2010/11F

Opening stock 7.27 6.36 4.32 7.22 7.4

Production 47.67 48.63 58.37 59.8 55.64

EU-27 16.12 18.44 19.07 21.68 19.98

Ukraine 0.6 1.06 2.87 1.87 1.45

Canada 9 9.53 12.64 12.5 10.87

China 12.65 10.57 12.1 12.8 11.8

India 6.2 4.85 6.2 5.5 5.35

Total Supplies 54.94 54.99 62.69 67.02 64.17

Crush 45.9 48.28 51.95 57.22 55.82

Other use 2.68 2.39 3.52 3.2 2.94

Ending stock 6.36 4.32 7.22 7.4 5.41

EU-27 1.3 0.72 1.53 1.47 1

Canada 1.82 1.46 1.8 2.12 1.3


Rapeseed output is likely to plunge for the year 2010/11 to 55 million tons,

which would be first ever reduction in last several years. World Rapeseed output

is likely to plunge by 4.16 million tons for the year 2010/11. Such a development

came into existence mainly because of two reasons. European Union & Black

seas rapeseed crop is likely to plunge by almost 7-8% due weather uncertainties

caused by the ongoing La Nina. And excess wetness and rain in the key rapeseed

growing areas of Canada during the harvesting period which will lead to rapeseed

production to fall below 11 million tons. China too is likely to witness some

reduction in rapeseed output because of frost weather witnessed by the crop

during its growth stage.

South America’s soybean crop to

decline by 8-10%

World Rapeseed supplies to

decline by 5%

Rape seed and Sunseed crop - A

Concern

November 1, 2010


All an all we conclude that such a reduction is likely to lead to lower rush of

Rapeseed crop in turn which will lead to lower Rape oil production. With overall

consumption of edible oil remaining robust and a likely reduction in Rape oil due

to lower crushing is likely to further tighten the Oil stocks for the year 2010/

2011.

World Rapeseed Crush & Rape oil supplies

Sunseed S&D’s (million tons)

2006/07 2007/08 2008/09 2009/10E 2010/11F

Opening stock 2.46 1.76 2.58 2.98 1.76

Production 30.39 29.32 34.78 32.16 31.64

EU-27 6.41 4.97 6.91 6.99 6.85

Russia 6.35 5.5 7.3 6.5 6.2

Ukraine 5.55 4.88 7.1 7.3 6.9

USA 3.19 4.62 3.2 1.38 1.38

Argentina 0.82 4.62 3.2 2.3 2.13

Total supplies 32.85 31.08 37.36 35.14 33.94

Crush (Sept/Aug) 27.64 25.13 31 30.1 28.96

Other Use 3.45 3.37 3.38 3.28 3.37

World sunseed crop is likely to plunge for second year in a row during 2010/11,

which will leave World Sunseed production at three year low during the year

2010/11. The planting for Sunseed were seen at record high for Russia and

Ukraine. Despite record acreage the production is likely plunge because of

drought faced by Russia and Ukraine which has reduced overall food grains output

by minimum 15-20% for the year 2010/2011. A reduction in crop is likely to

reduce the Sunseed crushing by 1.14 million tons for the year 2010/2011.

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Rape seed crush Rape oil supplies



World Sunseed crop at three year

low

November 1, 2010


Combined Rape oil & Sun oil supplies

A decrease in Rapeseed and Sunseed production followed by lower crushing of

both Sunseed and Rapeseed is likely to reduce the overall supplies of edible oils

for the year 2010/2011. For the first time in several years we are likely to see a

decline in combined supplies of Rape oil and Sun oil. For the year 2010/2011

combined supplies of Rape oil and Sun oil is likely to decline by 1.46 million

tons against an average increase of 1.5 million tons in last five years. All these

factors together are likely to prove bullish for the entire edible oil complex and

support edible oil prices in long term.

Alternate usage causing problems for primary usage.

World Biodiesel production has witnessed a tremendous growth since last decade.

The world Bio-diesel production has grown almost 34.35% on CARG basis in

last ten years. And the same is expected to continue for the years to come at a

minimum growth rate of 15-18% going forward.

For the year 2011/2010 we are likely to witness an incremental demand of Edible

oils of more than 7 million tons of which 3 million tons will be contributed by

Bio-diesel sector alone. Key players are EU-27, Argentina & Brazil and US followed

by India, China and Indonesia who are likely to induce biodiesel mandate in

years to come.

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Rape oil supplies Sunoil Produc�on Combined Rape oil and Sun oil supplies


Combined supplies of Rape oil &

Sun oil to decline by 1.46 million

tons.

November 1, 2010


The usage of edible oils for production of Bio-diesel has been in the debate for

almost more than a year to decide the fate of edible oil prices. With US Bio-diesel

tax expired since Dec 2009 and no new development on the same has led to a

drastic reduction in usage of Edible oils for Biodiesel in the US. Off late there has

been a hope about same bio-diesel tax credit (RFS2 guidelines) too be passed

retrospective. Such a development will force the Bio-diesel plant owners to step

up their production of Biodiesel. The Biodiesel production for the year 2010 till

date has been less than 50% that of 2009 as due to absence of the tax credit all the

plants in US were running in great disparities. For the year 2010/11 USDA too

has increased its estimates for usage of Edible oil for methyl ester (Bio-diesel) to

2900 mn lbs from 1700 mn lbs.

US’s Soy oil usage for Methyl ester

As clearly discussed in the above chart United states usage of Soy oil for production

of bio-diesel is likely to revive in months to come with an expectation of approval

Source : Oil World, NB Research

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World Biodiesel output


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US Soy oil usasge for biodiesel to

witness a revival.

November 1, 2010


for 1$ tax credit will be approved soon. Moreover US's consumption of Soy oil

domestically too is expected to revive which will trim the overall ending stock of

US soy oil to 2,371 million lbs from 3,176 million lbs as per USDA October

report.

Brazil's & Argentina's lower exports of Soy oil

For the year 2009/10 we saw a drastic decrease in South America's soy oil exports

primarily from Argentina mainly on the back of a trade dispute between China

and Argentina which actually stalled China's imports of soy oil from Argentina.

But such a gap was more or less fulfilled primarily by India and a few other

nations. The actual reason as per us what we believe for a drastic reduction in soy

oil exports was Argentina's and Brazil's implementation of compulsory 5% bio-

diesel mandates caused a greater usage of Soy oil towards blending activities.

For the current year prospects as far as Argentina and China's trade relations are

concerned they have shown some sign of improvement, as China has resumed its

import of soy oil from Argentina. And recently there has been a purchase of soy

being reported by a Chinese buyer for the same.

South America’s Soy oil Production (million tons)

2007 2008 2009 2010E 2011F

Argentina 6.96 6.02 5.77 6.82 7.3

Brazil 6.05 6.27 5.9 6.7 6.75

Total 13.01 12.29 11.67 13.52 14.05

As far as the usage of Soy oil for production of Bio-diesel is concerned it will we

be seen making new highs as the domestic plus the export demand for the same is

expected to remain robust in the coming months.

South America’s Biodiesel Production (million tons)

2007 2008 2009 2010E 2011F

Argentina 0.18 0.72 1.18 2 2.5

Brazil 0.36 1.03 1.41 2.05 2.3

Total 0.54 1.75 2.59 4.05 4.8

Recently Kirchner Administration signed a mandate to produce 70KMT/months

and the domestic mandates in Argentina are likely to shift to 7% during 2011 and

to 10% for the year 2012.



Biodiesel guzzels South America’s

soy oil exports

November 1, 2010


South America’s Soy oil Exports (million tons)

2007 2008 2009 2010E 2011F

Argentina 6.5 5.07 4.56 4.8 5

Brazil 2.34 2.32 1.59 1.6 1.2

Total 8.84 7.39 6.15 6.4 6.8

Whereas Brazil is likely to continue with its old mandate of compulsory blending

5% of Bio-diesel, but at the same its domestic appetite for energy product is likely

to increase for the years to come which in turn is likely to increase to the usage of

soy oil for production of Bio-Diesel.

Argentina Biodiesel Production, Exports & Consumption (‘000 tons)

Production Exports Consumption

2007 180 168 2

2008 720 725 5

2009 1180 1150 20

2010 2000 1410 590

2011 2500 1400 1100

Argentina produced about 1.2 million tonnes of biodiesel in 2009 virtually all of

which was exported and it is expected to produce around 2 million tonnes of

biodiesel for the current year. Whereas for the year 2011 Biodiesel production is

expected to increase by 25% and it is estimated overall biodiesel production will

stand 2.5 million by Argentina alone. A brisk market for plant based fuels in

European Union countries has seen Argentina's exports increase more than fivefold

and country is now one of the biggest providers of Bio-diesel.




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Produc�on Exports Consump�on

Argetina’s Biodiesel consumtion

likely to doubled for 2011

November 1, 2010


Rising South America’s Biodiesel demand

Argentina's biodiesel law is not expected to dent fast growing and shipment of

fuels will rise further in spite of vast new domestic market. Producers have enough

installed capacity to meet the needs of both the internal and export market. Exports

should rise to about 1.4 million tonnes this year as compared to 1.2 million

tonnes last year.

Increasing global output of biodiesel is likely to restrain soyoil exports this year

by the top supplier United States, Brazil and Argentina.

Insipte of posting a record high soy oil production for 2009/10 followed by

2010/11, the export are likely to witness only mild improvement for the current

year mainly backed by robust Bio-diesel domestic as well as international demand.


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SA total Soy oil consump�on

November 1, 2010


EU's increasing appetite for Edible oils.

EU's usage of edible oils has increased on consistent basis in past decade. Its

domestic production of edible oil is likely to decline by 0.4 million tonnes against

increase in edible oil consumption of roughly around 3 million tons. After almost

8-9 year we are likely to witness a drop in production of Edible oil from EU in the

year 2010/2011.

EU’s Edible oil Production & Consumption

EU's consumption for various is oils for 2010/2011 are as follows:

¢ Consumption of Rape oil is likely to be 10.05 million tons.

¢ Consumption of Palm oil is likely to be 6.45 million tons.

¢ Consumption of Sunoil is likely to be 3.675 million tons.

¢ Consumption of Soybean oil is likely to be 3.21 million tons.

The huge gap between EU's domestic production and its consumption for 2010/

2011 for Edible oils is likely to be fulfilled by record large imports of 9.7 million

tons during 2010/11.

EU’s Edible oil imports

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Total Edible oil Usage Total Edible Produc�on



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Oil, Coconut Oil, Olive Oil, Palm Oil, Palm Kernel

Oil, Rapeseed Oil, Soybean Oil, Sunflowerseed Eu's total edible oil imports

November 1, 2010


EU's imports of Edible oil is likely to be record high for the year 2010/2011 as it

needs to bridge the ever increasing gap between its domestic production and its

overall edible oil consumption. The increase in EU's edible oil consumption is

mainly attributed towards its increasing Bio-diesel appetite which immerges

primarily from countries like Spain, France, Germany and Italy. They not only

produce Biodiesel but they are also one of the largest Biodiesel importers from

Argentina.

EU’s Rape oil consumption

EU's usage of rape oil for Biodiesel was roughly around 6.6 million tons in the

year 2009/10 against 5.7 million tons for the year 2008/09. Going forward for

the year 2010/11 we expect EU's usage of Rape oil for production of Bio diesel

will rise to the levels of 6.8 million tons. Overall consumption of Edible oil for

production of Bio diesel would increase to 10.85 million tons up 0.96 million

tons from previous years. EU's usage of Edible oil for Biodiesel production is

expected to be seen at record high levels.

EU’s Edible oil usage for Biodiesel

EU’s Edible oil imports to revive

forced by lower domedtic

producyion

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Industrial Usage Food Usage



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Oil, Coconut Oil, Palm Oil, Rapeseed

Oil, Soybean Oil, Sunflowerseed Total Usage of Edible oil for Biodiesle

November 1, 2010


Consumption of Edible oils growing as ever in China

China continues to grow strongly and its consumption of vegetable oils will

continue to surpass normal growth as per the expectation. China's imports of

soybeans as well as of palm oil will continue to be strong for the years to come.

China's recent step to start its trade with Argentina after a ban of almost 8-9

months is likely to step up China's imports of soy oil from Argentina. Moreover

China's Edible oil imports are likely to revive this year after its first ever bleep in

imports witnessed in the year 2009/10. At the same a decrease in imports of

edible oil for the year 2009/10 was not on account of decrease in demand from

China's, rather the fact that China was more interested in importing oilseeds and

then crush them, which in the end proved out to be a nullifying impact. Overall

consumption of edible oils by China remained robust for the year 2009/10. For

the year 2010/11 China's import of Edible oil is likely to be 10.85 million tons at

record high levels against 9.4 million tons in 2009/10.

China’s Edible oil imports

China's consumption of edible oils is likely to remain robust with its trend upwards.

China's consumption of edible oil has witnessed a CAGR of 9.6% since last

decade. For the year 2010/10 we expect China's consumption of edible oils to

reach the record high levels of 34 million tons witnessed by no other country.

China's consumption alone comprises more than 20% of world edible oil

consumption.


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China’s Edible oil imports to

cross 10 million tons mark

November 1, 2010


China’s Edible oil consumption

Till the year 2008/09 China's incremental consumption of Edible oil was roughly

in the range of 1-1.5 million tons per year. In the year 2009/10 China's incremental

consumption of all these major oils & fats increased by 4.25 million which we

underestimated to be around 2 million tons in our previous report. For the year

2010/11 we expect incremental consumptions of all the major oils & fats by

China is likely to be a tad lower than 5 million tons.

China’s incremnetal consumption of Edible oils

China’s per capita conumption of Edible oils


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November 1, 2010


Per capita consumption for edible of China has probably grown even at a much

faster throughout the decade. This has even got to do with overall growth story of

China, as the economy develops so does improves the level of income.

India just a step behind China

The south west monsoon was in ample for the current year mainly on the back of

La Nina which helped the revival of Indian monsoon which was erratic last year

caused by El Nino. This overall monsoon was reported above average as per

IMD which in turn helped the sowing of the Kharif oilseeds. Oilseeds acreage for

the current year was seen at 175.35 million ha against 174.13 million ha in 2009.

Despite of a minuscule increase in overall acreage of Kharif oilseeds the production

is likely to turn higher as compared to that of the previous because of higher

yields helped by above average rainfall.

India's Edible oil production (‘000 tons)

2010-11F 2009-10E 2008-09 2007-08 2006-07 2005-06

Soybean oil 1150 950 1200 1445 1280 1140

Cotton oil 1100 1050 1000 1050 920 755

Groundnut oil 550 425 650 900 580 950

Sun oil 285 425 500 550 580 620

Rape oil 1950 1950 1800 1700 2150 2250

Sesame oil 160 160 150 150 120 125

Coconut oil 425 425 390 380 380 400

RiceBranoil 730 700 740 720 680 660

Others 300 250 250 250 225 200

Total 6650 6335 6680 7145 6915 7100

But the main problem which still exists is India's yield of all the nine oilseeds

produced is lowest among all the major oilseeds producers in the world. India

will gradually become an importer of all foodstuffs and especially edible oils in

years to come. For the current we expect India's crushing of oilseeds to at record

quantum mainly on the back of robust export demand of Oil meals coupled with

decent and gradual increase in domestic oil meals for the poultry industry.

Moreover the crush margins have been positive on consistent basis since last

three-four month motivating. Higher crushing of Oilseeds is likely to increase the

overall domestic production of Edible oil for the current oil year. Such a

development might lead to reduction in pace of imports of Edible oil by India for


India’s Edible oil production to

witness a revival

November 1, 2010


the current year, but this will be only on temporary basis as there is no surety how

actually the Rabi oilseeds production and next year's Kharif oilseed will turn out.

This year itself there has been talks about the fact that the bean size has been

smaller as compared what was estimated which is likely to affect the actual yield

of Soybean and the overall crop might shape up a tad lower as compared to

traders anticipation. All in all India's 60% or more Edible oil requirement can

only be satisfied by imports and we are likely to remain net importers of all the

major food stuffs.

India's Edible oil imports (‘000 tons)

2005-06 2006-07 2007-08 2008-09 2009-10E 2010-11F

Soy oil 1770 1335 750 990 1691 1245

Palm oil 3000 3665 5270 6770 6512 7248

Sun oil 90 200 30 590 628 650

Laurics 240 200 200 240 250 230

Others - - - 50 50 50

Vanaspati 300 215 50 - - -

Total 5400 5615 6300 8640 9131 9423

India's inefficiency with respect to increase its oilseeds production and ever

increasing its appetite for food grains is likely to force India to again import

record large quantity of food grains for the year 2010/11. India's thirst for edible

oils is increasing at a very rapid pace and still continues to grow. India is expected

to import 9.4-9.5 million tonnes of edible oils for the year 2010/2011. Palm oil

expected to account roughly 7.2-7.3 million tones where as Soy oil shipments are

likely to be lower at 1.2-1.5 million tons mainly on the back of revival in domestic

production of Soy oil for the current year.

India’s Edible oil imports

Source : USDA, Oil World, SEA, NB Research

India’s Edible oil imports to

surpass expectations


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Soy oil Palm oil Sun oil Laurics Others Vanaspa� Total

November 1, 2010


India’s Edible oil consumption (‘000 tons)

2005/06 2006/07 2007/08 2008/09 2009/10E 2010/11F

Soybean oil 2850 2550 2100 2150 2710 2750

Cotton oil 720 900 1000 1000 1050 1125

Gn oil 1020 580 880 650 450 635

Sun oil 680 780 580 1050 852 750

Rape oil 2250 2150 1650 1800 2250 2370

Sesame oil 160 120 150 150 160 160

Palm oil 3150 3925 5090 6530 7000 7320

Laurics 450 600 600 600 650 650

RiceBranoil 650 680 720 740 700 740

Others 350 225 225 250 250 250

Total 12280 12510 12995 14920 16072 16750

Pop.Mlns 1100 1120 1140 1160 1175 1203

Per cap kg 11.16 11.17 11.4 12.86 13.28 13.92

India's consumption of edible oils is likely to increase by almost 5% during the

current year. India's overall edible oil consumption is likely to hit the levels of

16.7 million tons at record high. Its per capita consumption of edible oils is likely

to be 13.92 kg/ person for the year 2010/2011 still half of that of China. India's

consumption of edible oils is expected to grow in years and may even surpass

China by next decade.

India’s Edible oil S&D’s (‘000 tons)

2006/07 2007/08 2008/09 2009/10E 2010/11F

Opening Stock 850 750 1025 1250 975

Production 6,915 7,145 6,680 6915 7100

Imports 5,615 6,300 8,640 9131 9423

Consumption 12,510 12,995 14,920 16072 16750

Exports 120 175 175 250 200

Ending Stocks 750 1025 1250 975 548



November 1, 2010


World’s Edible oils S&D’s

Before discussing the world demand and supply scenario let us discuss various

events which took place which hampered world oilseeds production.

The first to come was the cruel and unfortunate drought in Russia and in parts of

the Ukraine. The after effect of that drought is still not over and the repercussions

of the same will stretch well beyond this harvest and into the next season. This

drought has actually affected the yield of sunseed crop grown widely across both

Russia and Ukraine and expected to reduce the yields by a minimum of 15-18%

from that of 2009. Despite of record plantings for sunseed in the current year we

are expected to see lower production for the second year in a row.

Another major factor that hampered the supplies was, CPO production which

was hampered by El Nino till May 2010 and now its so called brother the La

Nina too has not too proven of any relief. Malaysia's CPO production improved

a little and it exceeded our previous expectation of 17.2 million tons and actual

production will roughly be around 17.6 million tons. But the same was set off by

Indonesia's CPO production from Indonesia. As the outcome of CPO production

in Indonesia has been worse than expected.

Indonesian CPO production has disappointed and there is a greater consensus

now that growth will be just 500,000 tonnes for 2010. Hence, for 2010, there will

be very little or no growth in CPO production. All in all the supplies of CPO for

2009/10 increased merely by a million ton against our previous estimates of 0.8

million tons.

A handsome increase in production was witnessed by soy oil. Record large soybean

crop in 2009/10 coupled with record large crushing's of soybean crop lead to

ample supplies of soy oil for the year 2009/10. Soy oil production increased by

2.2 million tonnes against our expectation of 1.65 million tons in our previous

report.

Moreover for the current year as well soy oil supplies are likely to be ample

backed by some handsome crushing activities. But at the same time it has become

difficult to actually estimate the actually production one year in advance especially

with the current ongoing La Nina scenario. The event has so far caused great

problems with respect to South America's soybean production especially in Brazil.

The same is been discussed in detail in the beginning of the report.

November 1, 2010


We expect the production of soy oil will be a tad higher in 2010/11 despite of

lower production mainly on account of higher crushing's to fulfill the ever growing

world Edible oil demand. The combined deficit of rape oil and sun oil of 1.46

million tons will have to be fulfilled by soy oil to a certain extent.

Therefore, we can summarize Global Incremental Supply of Edible

oils as follows (‘000 tons)

Oct 08 to Sept09 Oct 09 to Sep 10 Oct 10 to Sep 11

Soya oil - 1500 + 2200 + 2000

Rape oil + 1800 + 1300 - 1160

Sun oil + 2000 - 1000 - 300

Gn oil - 200 - 200 + 200

Cotton oil - 200 - 200 + 100

Palm oil + 1500 + 400 + 1800

Lauric oils + 100 + 200 - 250

Total Increase + 3500 + 2900 2550

For the third consecutive we are likely to witness a drop in incremental production

of all vegetable oils for the year 2010/11. This was primarily caused by an

immense drop in sun oil and rape oil supplies.

World Demand

During the year 2008/09 the demand for edible oils expanded by 4.5 million

tons. While during 2009/10 the incremental demand for edible oils further

increased to 6 million tons mainly on the back of industrial usage of edible oils by

US, Brazil, EU and Argentina. Moreover the food demand from developing

nations like China, India, Indonesia and Brazil was seen higher.

World disappreance of Edible oil

Weather concerns around the

world causing third consecutive

decline in incremental production

of Edible oils


0

1000

2000

3000

4000

5000

6000

7000

8000

9000

0

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40000

60000

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100000

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1984/1985 1989/1990 1994/1995 1999/2000 2004/2005 2009/2010

In ('

000

tons

)A

nnua

l cha

nge

in W

orld

Ed

ible

oil

dem

and

Wor

ld's

dis

appe

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e of

Edi

ble

oils

In ('

000

tons

)

Annual Change Total Disappreance


November 1, 2010


For the year 2010/11 we expect a further expansion in edible oil demand. As we

expect incremental demand for edible oils is likely to be minimum 7.2 million

tons primarily for two reasons. A further enhancement in these energy mandates

will force the countries such as Argentina, Brazil and EU to use more edible oil to

satisfy their thirst for Biodiesel. For the year 2010/11 we expect usage of edible

oils in production of Biodiesel to expand roughly by 3.2 million tons. And the

rest of the expansion is likely to be witnessed from the food industry especially

from developing nations such as China, India, and Indonesia.

Incremntal Demand-Supply dynamincs (‘000 tons)

Oct 08 to Sept09 Oct 09 to Sep 10 Oct 10 to Sep 11

Supply + 3500 + 2900 +2550

Demand +4500 +6000 +7200

Surplus (Deficit) (1000) (3100) (4650)

For the second year in a row an increased edible oil production is not even sufficient

to fulfill increased food demand for vegetable oils. So even if any of these countries

Argentina, Brazil and US withdraws their Bio-diesel mandate won't help as carry

forward stock is likely to witness a further trimming.

World’s ending stocks of Edible oils

All these development is likely to further trim World's edible oil stocks which

were already tight during 2009/10.

This situation is not tenable and something must give during the year. Our guess

is that prices must rise in order to make bio diesel uncompetitive in some

discretionary markets and to curb food demand. It also means that Oil Share will

have to rise dramatically in order to stimulate the crushing of soybeans.


Incremental demand &

production deficit widens further


0.00%

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4.00%

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8.00%

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12.00%

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2001/2002 2003/2004 2005/2006 2007/2008 2009/2010

In ('

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Total edible oil stock Stock to usage ra�o

World ending stock of Edible oil

witnesses further trimming

November 1, 2010


Big Acreage Battle Brewing for 2011/2012

With little land seen coming out of the Conservation Reserve Program and many

former farms seeing their land turned into sub-divisions, where will this acreage

come from?

There appears to be a big acreage battle looming this upcoming year with very

attractive forward corn, wheat, and soybean prices. Which one will get short end

of the stick?

Acreage of 8 major grains in the US

This factor may turn out to mother all to create further bullishness in entire

oilseeds sector. As US is facing great difficulties with respect to their corn crop. A

reduced world corn production coupled with robust feedstock demand has pushed

world corn stock to 4 year low. The crux of the matter is that U.S. corn ending

stocks, and ending stocks as a percent of consumption are about the second lowest

ever, leading to forecasted record high prices.

If this situation is not to persist or even worsen next year, U.S. planted corn

acreage for next year is going to have to balloon to perhaps even higher than the

93.5 million than in 2007, the largest figure since 1944.In 2007, corn acreage

increased 5.2 million from the prior year and this single-handedly accounted for

almost all of the acreage increase for the 8 major crops compared to the prior

year. Corn accounted for 37.8 percent of all the planted area, the highest proportion

in years. While forward corn prices are very attractive, wheat and soybean values

are also very attractive. And there's also cotton, which has moved to all-time

highs and crop will almost certainly see higher plantings this coming spring.

Source : USDA, DTN Progressive farmers, NB Research

25%

27%

29%

31%

33%

35%

37%

39%

240000

245000

250000

255000

260000

265000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

In ('

000

hect

ares

)

Acerage of 8 major crops Cron %

November 1, 2010


Some analysts estimate the area planted for all major crops will have to increase

by 8 to 10 million acres in order to prevent ending stocks for some of them from

falling to intolerably low levels.

An acreage expansion of that magnitude, however, has not been seen since 1996

when then record high corn and wheat prices saw plantings rise by 6.1 and 7.8

million acres respectively, accounting for almost all of the 14.8 million rise in

area of the 8 major crops. Now looking at the wheat crop which is expected to

lower this led by the worst drought in Russia reducing its production to 42 million

tonnes against 66 million in 2009/10. Due to such a massive damage of the wheat

for the current year, Russia's government was forced to ban the export of wheat in

order to fulfill its domestic requirement (third largest export of wheat).

Such a development has brought all attention towards US wheat exports. US

wheat exports are expected to be increase roughly by 50% this in order to satisfy

world feedstock demand. An increase in exports by almost 50% is likely to trim

US wheat stock by 20-25% for the year 2010/2011.

Putting together all these factors we conclude that soybean prices need to post

smart gains to attract attention of farmers for sufficient and to remain in

competition with its peer grains acreage for the year 2011/12.

November 1, 2010


Disclaimer: This document has been prepared by N.B. Commodity Research (A division of

Nirmal Bang Commodities Pvt Ltd). The information, analysis and estimates contained herein are

based on N.B. Commodities Research assessment and have been obtained from sources believed

to be reliable. This document is meant for the use of the intended recipient only. This document,

at best, represents N.B. Commodities Research opinion and is meant for general information only.

N.B. Commodities Research, its directors, officers or employees shall not in any way be responsible

for the contents stated herein. N.B. Commodities Research expressly disclaims any and all liabilities

that may arise from information, errors or omissions in this connection. This document is not to

be considered as an offer to sell or a solicitation to buy any securities. N.B. Commodities Research,

its affiliates and their employees may from time to time hold positions in securities referred to

herein. N.B. Commodities Research or its affiliates may from time to time solicit from or perform

investment banking or other services for any company mentioned in this document.

Kunal Shah

Research Head

[email protected]

+91 22 3027 1522

Anuj Agarwal

Research Analyst -Commodities (Oil & Oilseeds)

[email protected]

+91 22 3027 1520

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