Summary - Tallow markets continue to suffer from the effects of the BSE crisis, the regulatory response to which has reduced overall consumption in the EU and caused major distortions of production and demand in the United Kingdom.
Tallow production in selected countries declined in 1996, despite growth in such major producers as China, Canada and Australia. The underlying cause was a decline in the United States, by far the world's largest producer. A sharp decline in production was also seen in the United Kingdom as a result of the BSE crisis, and Argentina continued in its fifth year of declining production. Increased world production is forecast for 1997 with gains in China, Australia, and Canada, while U.S. production remains flat.
World trade in tallow and grease declined in 1996, largely as a result of reduced consumption in the EU and lackluster trade performance in Asian markets such as Korea. The latter can be linked to increased substitution of vegetable oil products, particularly palm stearin, for animal fats. Trade is forecast to decline further in 1997 as a result of continued problems in the EU and declining imports in South America, where Brazilian production is forecast to increase, reducing that country's need for imports.
Domestic production of tallow and grease declined even further than expected during 1996 as lower cattle slaughter weights brought tallow yields down. Production is forecast to remain flat in 1997, as a slight decline in cattle slaughter is offset by a marginal increase in slaughter weight. Declining production of grease from hogs will likely be offset by continued growth in poultry production. Overall consumption increased by roughly 8 percent during 1996, largely as a result of increased utilization in feed rations triggered by high feed prices. Consumption is forecast to decline only slightly during 1997.
U.S. exports to all major destinations declined during 1996 under pressure from reduced domestic supplies, increased competition from other suppliers, and competition from vegetable oil substitutes. Edible tallow fared best, with an 18 percent decline in exports by value, while yellow grease dropped by roughly 44 percent. The average decline for all tallow and grease was 29 percent in value and 27 percent in volume.
The sharpest decline occurred in sales to China. Sales into this market have proven extremely volatile: in 1994 this was a minor market for U.S. exports, at roughly $2.4 million in sales. In 1995, China jumped into 7th place at nearly $39 million in sales, but now has fallen down to slightly over $2.6 million in sales.
An extremely sharp decline in sales to the Netherlands also took a bite out of export sales, as this market dropped over 50 percent due to a combination of increased imports from within the EU and strong competition from palm oil. A similar combination of forces brought about a decline in exports to Korea, which fell by nearly 50 percent.
Mexico was the largest market for U.S. tallow in 1996. Though exports of inedible tallow and grease to Mexico increased, this was offset by a decline in sales of edible tallow, leaving total exports to this market flat.
Turkey provided the sole relief among the major U.S. markets, with sales gaining by slightly over 1 percent in volume. This increase fell well short of expectations however, as Turkey's imports fell off during late 1996. As a result, the final 1996 import estimate and the 1997 forecast have been revised downward. Turkey uses tallow primarily in its booming soap industry, which exports to countries throughout the Middle East, North Africa and the former Soviet Union.
Total production of tallow and grease is estimated to have climbed by 11 percent in 1996 due to increased cattle slaughter. Further increases in slaughter are forecast to boost production another 12 percent in 1997. Estimated exports were revised slightly downward and imports increased, reflecting an even larger jump in domestic use than was originally forecast. Most of the increased domestic consumption is accounted for by increased use in livestock feed.
Overall exports are estimated to have been flat during 1996, with only marginal growth expected in 1997, as domestic use continues to absorb a large portion of the forecast production increase. The Netherlands continued to be Canada's largest market in 1996, even after sustaining a drop of over 22 percent in volume. This was nearly offset by a dramatic jump in exports to Belgium. Since much of the Canadian tallow exported to the Netherlands in the past has been re-exported to Belgium, this may merely reflect a change in shipping practices. Increased exports to the United States, China and South Korea also helped to offset losses in other markets. Growth in the China market did not match the phenomenal levels of previous years, indicating that this market may have peaked for the time being.
Production of tallow and grease has remained flat through 1996 and is forecast to continue at this level through 1997, despite growing demand. A variety of different factors constrain production growth. Chief among these are limited growth in beef production and high collection costs due to an inefficient distribution system. Slaughter facilities with integrated rendering plants are rare, though plans to modernize the Mexican beef industry may change this.
Demand growth has been driven primarily by livestock producers, who have increased their utilization of tallow and grease in animal feed, and by soap manufacturers and bakeries. This increased demand, combined with flat production volumes, has made Mexico a strong import market. The U.S. has been the primary beneficiary, increasing export volumes of inedible tallow by over 10 percent in 1996, with continued growth forecast for 1997. This growth was offset by declining sales for yellow grease and edible tallow during 1996, but some growth in these categories is forecast for 1997 as economic recovery continues.
Domestic tallow production fell slightly during 1996, and is now forecast to fall further during 1997. The decline is, in part, explained by a significant drop in cattle slaughter weights during 1996, followed by a forecast drop in slaughter numbers during 1997. Consumption posted a significant increase during 1996, with a further increase forecast for 1997 as the current recession comes to an end.
The combination of increased consumption and declining production has resulted in a drop in exports and an increase in imports, making Argentina a net importer for the first time since 1992. This disparity is forecast to expand further in 1997, creating a good opportunity for U.S. exporters. Uruguay and the United States are the largest suppliers to this market. Additional opportunities may be found elsewhere, as Argentine exports fall. Argentina's primary export markets include Egypt, the Netherlands, China and Senegal.
General - Regulatory actions have taken center stage in the EU, as they threaten trade at a number of levels. Equivalency talks between the EU and the United States, due to conclude in April, will determine the extent to which U.S. processors must meet the EU's stringent standards for processing of high risk' material. Meanwhile, the regulatory response to BSE has introduced a new threat. The European Commission has issued European Directive 97/1/EC, which would ban the use of materials containing specified bovine, ovine and caprine offal in cosmetics and soaps. This has been interpreted to include tallow, which is a key ingredient in many of these products. Should the directive come into effect, it will effectively shut down exports of tallow to the EU. The EU is the United States' second largest export destination for tallow, behind Mexico.
Netherlands - Total production was revised upward for both 1996 and 1997, despite an overall decline in hog and cattle slaughter. This reflects the import of raw animal fats from neighboring countries for rendering. Long term production is still expected to decline, mirroring the trend in animal slaughter. Consumption fell slightly during 1996, reflecting higher prices, but is forecast to increase slightly during 1997. Use of tallow and grease for human consumption and for animal feed declined, overwhelming a partial recovery in industrial use.
Trade patterns shifted during 1996 as a number of factors came into play. Though total estimated imports increased during 1996, shipments from within the EU accounted for a larger share than in 1995, resulting in a slight decline in imports from outside the EU. U.S. exports suffered an especially sharp drop, with Dutch sources citing limited availability from the United States and a less advantageous price relationship with palm oil. Exports of tallow and grease jumped sharply, as U.K. soap manufacturers turned increasingly to imports for raw materials, as a result of the U.K.'s regulatory response to BSE. Exports are forecast to drop slightly during 1997, though remaining above 1995 levels.
Belgium - Increased hog slaughter brought an increase in production during 1996, a trend that is forecast to continue during 1997. Consumption declined slightly during 1996, but is forecast to rebound in 1997. Total imports will decline however, as Belgian importers took advantage of low prices during 1995 and 1996 to accumulate large stocks. Belgian manufacturers frequently prefer North American tallow over domestic product, which is often of less consistent quality. As a result, Belgium exports much of its own product to other EU member states, most notably France. The dependence of Belgian manufacturers on imported tallow has given them a special concern for issues that may limit imports of North American tallow, such as equivalency.
United Kingdom - BSE has had its sharpest impact in the U.K., where production, consumption and trade have been severely distorted by the regulatory response to BSE. Total production of tallow and grease is estimated to have fallen by 35 percent as a result of cull schemes and regulations that require tallow that has come in contact with 'high risk' material (i.e., dirty' tallow) to be destroyed. High risk material includes the tissues and fluids of the brain, spinal cord and eyes of bovine, ovine and caprine animals. Tallow that is designated for destruction is not included in our production estimates.
U.K. consumption has declined even more quickly than production, as tallow use for human consumption and in animal feed has declined sharply. Tallow remains in demand for use in soap, normally about 40 percent of total demand. However, an inconsistency in current U.K. regulations governing the use of tallow, promulgated in response to the BSE crisis, effectively forbid the export of tallow or tallow-based products. The problem appears to be solely one of interpretation, as other U.K. and EU regulations allow export of these products. As a result, soap manufacturers have used imported tallow in order to assure that all their products remain exportable, rather than establish separate production lines for domestic and export product. This has brought about both an increase in imports and a rapid buildup of 'clean' tallow. As stocks of both clean and dirty tallow continue to accumulate, storage facilities in the U.K. are reaching capacity. It now appears likely that the regulations will be changed to allow export of clean tallow, before it becomes necessary to destroy surplus stocks.
The bulk of increased imports have come from the U.S. and the Netherlands. Imports are forecast to decline in 1997 as markets begin to stabilize. Exports fell dramatically in 1996 as a result of the EU ban on UK tallow exports, as well as the current regulatory problems, and are forecast to remain very low during 1997.
Production estimates for both 1996 and 1997 have been raised based on growing cattle slaughter. Domestic production is expected to climb as cattle slaughter continues to mount, and as collection and processing of materials becomes increasingly efficient. The import boom that began in 1994 appears to have faded in 1996 as imports fell from the all-time high reached in 1995.
The United States suffered particularly from the decline, as Australian tallow reclaimed the market share it lost in 1995. Increased availability of tallow in Australia, combined with tight supplies in the United States helped to explain the reversal. Canada and New Zealand held fast to their shares of this market. The long-term prospects for this market deteriorated substantially in late 1996, as China announced reductions on tariffs for vegetable oils, with no equivalent reduction for animal fats. This may result in increased substitution of vegetable oils in China's imports. Whether the anticipated increase in vegetable oil imports will create opportunities elsewhere remains to be seen.
Tallow production continued to grow, reflecting both increased cattle slaughter and greater efficiency within the industry. Imports suffered a nasty setback in 1996 as the Korean Customs Service (KCS) ruled that yellow grease was subject to a higher tariff than tallow. As a result, the tariff was raised from 3 percent to 8 percent and imports fell. Some relief is expected in 1997, as domestic feed manufacturers (the primary users of grease) complained that the increase was raising their production costs. In response, the government established a 74,000 MT quota for 1997, at the 3 percent tariff rate. This should allow imports to return to their previous level. During 1997, U.S. exporters can expect to face stronger competition from Australia and New Zealand, as these countries are now manufacturing grease that is unmixed with mutton grease, a practice that had driven off Korean importers in the past.
Outside the feed sector, Korean tallow consumption has remained remarkably stable. Noodle producers continue to favor palm oil over tallow, providing only limited prospects for expansion in this area. Meanwhile, soap production has stabilized, as the substitution of detergents in the manufacture of laundry soap appears to have run its course. The possibility that manufacturers may turn to palm oil has been raised however, as one of Korea's largest soap producers is reported to be experimenting with the use of palm oil. Such a changeover could reduce long-term demand by as much as 15 to 20 percent.
Demand for tallow and grease during 1996 climbed more rapidly than originally forecast, driven by low prices and increased demand from feed manufacturers. Increased prices are expected to bring consumption back down during 1997. Imports increased, mirroring demand growth, as Taiwan imports virtually all of its consumption. The U.S. was unable to benefit from this growth, as U.S. yellow grease was reclassified from 'tallow' to 'other fats and oils' during 1995. As a result, the tariff on yellow grease jumped from 1 percent to 15 percent. This effectively shut down imports of yellow grease, in favor of third grade tallow from Australia and New Zealand, which remains dutiable at 1 percent.