Tallow and Grease
In 1999, tallow and grease prices fell to nine-year lows and caused the value of U.S. exports to decrease 24 percent. U.S. exports to Asia have been driven by Korea's increased dependence on imports to satisfy demand, while the European Union's tallow and grease market continues to be hindered by food safety issues.
Tallow and grease production in 1999 for the countries covered in this report is expected to increase 1.7 percent from 1998 to 8.5 million tons. The United States and Canada accounted for a majority of the increase while other regions remained mostly unchanged. In 2000, production is forecast to decrease 3.1 percent to 8.2 million tons as U.S. slaughter and animal weights fall.
Tallow and grease prices have been extremely volatile over the last three years, but have generally trended downwards. Between March and August 1999, tallow and grease prices plummeted to nine-year lows as a result of falling fish meal and palm stearin prices. These competitor product prices began to drop dramatically in October 1998 as world fish oil and palm oil production rebounded faster than anticipated.
In FY 1999, world fish oil output increased 45 percent as fish catches in Chile and Peru recovered from the effects of El Niņo. World palm oil production also rebounded from El Niņo and increased 14 percent. These production gains caught many observers by surprise and caused prices to erode.
In addition to recent production gains, world palm oil availability received an additional boost from relaxed palm oil export taxes in Indonesia. On February 1, 1999, the crude palm oil export tax was reduced from 60 percent to 40 percent, and the Refined Bleachable Deodorized (RBD) palm stearin export tax was reduced from 20 percent to 10 percent. On July 2, 1999, the crude palm oil tax was further reduced to 10 percent, and the RBD palm stearin tax was reduced to zero.
Beginning in June 1999, fish meal and palm stearin prices strengthened as a result of increased world trade. This had a positive effect on tallow prices. The average monthly price of tallow rose to $392 in September, up from $319 in June.
In 1999, U.S. tallow and grease production is expected to increase 4 percent to 3.86 million tons due to increased cattle slaughter. This increased production has compounded the effect of falling competitor product prices. Tallow and grease production for the year 2000 is forecast to decrease 10 percent to 3.56 million tons due to reduced cattle slaughter. This decrease in domestic production should help strengthen the world price of tallow and grease.
In 1998, tallow and grease exports benefitted from having lower prices relative to palm stearin and fish meal. However, in the first nine months of 1999, falling competitor prices reduced the price margin that tallow and grease exports enjoyed. This had a negative impact on tallow exports to Turkey, Argentina, and Brazil as substitution occurred.
U.S. tallow and grease exports for 1999 are expected to increase by less than one percent to 1.26 million tons. Total value is expected to decrease 17 percent to $460 million as a result of falling prices. In the year 2000, exports are forecast to decrease 4 percent to 1.21 million tons as production is expected to decrease.
U.S. tallow and grease exports to Asia have grown rapidly in 1999 and are expected to reach 250,000 tons, a 60-percent increase over last year. Between January and August 1999, exports to Asia totaled 164,345 tons. This increase is attributed mainly to Korea.
Between January and August 1999, U.S. exports to Korea totaled 86,886 tons, more than twice the quantity for the same period last year. A comparative price advantage over palm oil and a 15-percent decrease in Korea's domestic production of tallow and grease has helped boost U.S. exports to an estimated 120,000 tons in 1999. U.S. exports to Korea are forecast to decrease slightly to 110,000 tons in the year 2000. The 8-percent decrease in the year 2000 will likely result from increased competition from Canada and New Zealand.
Many of Korea's powder detergent manufacturers have increased their utilization of tallow as a result of falling prices. Food processors have also increased their usage of edible tallow despite weak demand from the instant noodle sector. Earlier this spring, Korean courts exonerated the instant noodle industry for complicity in the scandal that saw inedible tallow marketed as edible. However, the noodle industry is still concerned with consumer perception of tallow use.
The European Union's (EU) tallow and grease market continues to be hindered by food safety issues. In addition to fears related to Transmissible Spongiform Encephalopathies (TSE), the discovery of the carcinogenic chemical dioxin in Belgian eggs and chicken meat on June 4, 1999 has heightened the public's concern. The tallow and grease industry has been increasingly scrutinized because the dioxin was traced to animal feed produced with recycled fats contaminated with motor oil.
The dioxin crisis prompted the EU's Standing Committee on Animal Agriculture and Nutrition (SCAN) to assemble in July to discuss the prohibition of certain feed ingredients and to establish maximum dioxin levels for feedstuffs containing fats of animal origin. Regulations proposed by SCAN would also ban recovered vegetable fat and animal fat not manufactured in accordance with earlier EU regulations.
In August, media reports prompted SCAN to investigate allegations that animal feed produced in France were tainted with dangerous pesticides, heavy metals, and pesticides. SCAN also contacted Germany and the Netherlands following similar media reports. Veterinary officials from the EU carried out a series of inspections to verify the claims and drafted an advisory report. The report has yet to be made public.
In September, SCAN convened to vote on proposed legislation, but the decision was delayed due to a lack of consensus between the Commission and member states. Proposed regulations are still pending a vote by SCAN. If the proposed regulations are implemented, U.S. tallow exports to the EU would be seriously threatened. U.S. government officials met with industry representatives and prepared a demarche in response to the proposed regulations.
The proposed Specified Risk Material (SRM) ban also threatens to disrupt trade as the scheduled vote in January 2000 nears. SRMs have been defined to include the brains, eyes, tonsils, and spinal cord of cattle, sheep and goats aged over one year and spleens of sheep and goats. The proposed legislation has been postponed twice, most recently in December 1998. This legislation was the result of enormous public pressure to do something about Bovine Spongiform Encephalopathies (BSE) and the new variant Creutzfeldt-Jakob Disease. The ban would prohibit the use of SRMs in any product sold in the EU.
The uncertainty of the future of the EU market is evident in U.S. export figures. Between January and August 1999, U.S. tallow and grease exports to the EU decreased 13 percent over the same period last year and totaled 65,508 tons. Though U.S. exports of tallow and grease exports to EU may the reach 100,000 tons in 1999, this quantity pales in comparison to the 1995 level of 310,984 tons, the year prior to the BSE crisis.
Central and South America
In 1999, U.S. exports of tallow and grease to Central and South America are expected to decrease 7 percent to 275,000 tons. U.S. exports to Colombia and Guatemala increased significantly while exports to Argentina, Brazil, and Chile decreased. Exports to Chile and Peru decreased as a result of higher fish catches in these two countries and lower fish meal prices relative to tallow.
In 1998, U.S. tallow exports to Colombia surged 53 percent to 57,674 tons. Exports have continued this upward trend, reaching 44,646 tons as of August 1999. The United States accounts for 95 percent of Colombia's tallow imports. More than 80 percent of all tallow consumed in Colombia is used to manufacture soap, with the remainder being evenly divided between animal feed and human consumption.
Although U.S. tallow and grease exports to Colombia have been increasing, they have suffered from high import tariffs. Tallow is subject to a variable import duty under the Andean Community price band system. Colombia's basic tariff rate for tallow is 15 percent. However, the actual duty applied to tallow is the same as the duty for palm oil. In August 1999, the duty reached 93 percent of the value of the importation. Notably, there were no U.S. exports of tallow and grease to Colombia in August.
In accordance with World Trade Organization customs valuation commitments, imported goods are required to be based on the transaction value rather than a minimum or administratively determined value. Developing countries were given additional time to adhere to this regulation. Venezuela is scheduled to terminate the program on January 1, 2000 and Colombia is scheduled for April 30, 2000.
Between January and August 1999, U.S. tallow and grease exports to Venezuela remained unchanged over the same period last year and totaled 26,069 tons. The United States accounts for 95 percent of Venezuela's tallow imports. All domestically produced tallow is used by the animal feed industry while imported tallow is used by the soap and feed industries. Domestic consumption is expected to decrease slightly as demand from the soap market weakens.
The United States remains Guatemala's sole tallow supplier. Between January and August 1999, Guatemalan imports of tallow and grease increased 56 percent over the same period last year and totaled 45,506 tons. Strong demand from the soap and feed industries as well as increased demand from the poultry industry has sparked the growth.
Guatemala's domestic tallow production continues at extremely low levels. Decreased cattle slaughter, low quality and inconsistent supplies have virtually eliminated demand for domestically produced tallow.
Tallow and grease imports continue to play an important role in Mexico, representing 80 percent of total supply. The United States accounts for over 95 percent of this trade, with the remainder coming from Canada. Between January and August 1999, Mexico imported 179,810 tons of tallow and grease from the United States, down 10 percent from the same period last year.
Because the price of imported tallow is currently lower than the price of palm stearin, demand is expected to remain strong through the year. Tallow consumption is forecast to increase 1 percent in 2000 due mainly to increased demand from animal feed companies and vertically integrated swine and poultry operations.
On July 21, Mexico published a new proposed regulation which would prohibit the use of imported rendered products in animal feed from countries with BSE or scrapie, unless they were first treated with high temperature and pressure. The proposed regulation would apply to both domestic and imported product.
If published, the final rule would become effective 60 calendar days from the publication date. However, high-temperature plants would be given two years to comply, provided they submit to Mexico's Secretariat of Agriculture, Livestock and Rural Development definite plans to make the modifications required to comply with the rule.
In particular, the proposed rule states that imports would be prohibited of tissue, offal, and meal of bovine origin destined for animal feed when the country of origin and/or shipping country is affected or has commercial or zoosanitary practices which exposes them to BSE. The proposed rule also states that imports would be prohibited of ovine origin when the country of origin and/or shipping country is affected or has commercial or zoosanitary practices which exposes them to scrapie.
If this proposed rule is adopted in its current format, U.S. tallow and grease exports to Mexico would be prohibited. In response to the proposed regulation, the United States Department of Agriculture provided Mexican authorities with comments to the proposed regulation.
Over 85 percent of Turkey's tallow imports are supplied by the United States due to the quality and reliability of supply. Between January and August 1999, U.S. tallow and grease exports to Turkey decreased 39 percent over the same period last year and totaled 59,172 tons. This decrease has largely been the result of the ongoing global economic crisis, which reduced soap exports to the former Soviet Union and other regional markets.
At the start of 1999, the soap industry had excess stocks of both tallow and soap. Because of falling palm stearin prices, Turkey's major soap producer purchased a significant quantity of palm stearin for the first time in several years. Still, most of the tallow stocks should be drawn down over the year as demand for Turkish soap increases. In the last few months, soap demand from Ukraine has started to recuperate.
FAS/NRA Partnership in China Pays Off
FAS and the National Renderer's Association (NRA) have focused efforts to build demand for U.S. rendered products in China. In fact, current U.S. exports of animal fats and greases to China (Jan-Aug 99) are running over three times that of last year.
FAS's Market Access Program (MAP) and the Foreign Market Development Program (FMD) provide the funds to conduct a variety of activities and the National Renderer's Association has the overseas representation and technical knowledge to make the programs effective. Much of the cited increase in trade is due to this cooperative effort, successfully demonstrating the feed value of U.S. yellow grease to prospective end-users in China.
A major breakthrough in this effort occurred in February 1999 when Chinese officials agreed to allow 30,000 tons of U.S. yellow grease to be imported, on a one year trial basis, at significantly reduced duties. This was a result of activities that date back to the summer of 1997 and include participation at feed nutrition conferences, various feed fat trade missions, sponsorship of a feed formulation workshop, feeding trials and repeated visits with Chinese government officials.
Activities first focused on Guangdong and Shandong Provinces, which are now collectively import an approximate 3,000 tons monthly. This spring, feed formulation workshops and feed nutrition workshops targeted Guangxi, Shanghai and Henan areas, new markets potentially importing an additional combined 1,000 tons per month.
U.S. exports to China are expected to reach 30,000 tons in 1999, valued at about $9.5 million. Challenges remain to achieve this level. Dioxin assurances remain important. In addition, U.S. product is facing increased competition from palm oil as those supplies rebound and relative prices fall.
The value of U.S. yellow grease was easier to demonstrate with relatively high prices on competing products. However, U.S. yellow grease has better energy value than palm oil and this message will continue to be delivered to targeted groups. There also remains the future issue of more permanent duty changes and free import volume vs. quota control. Understandably, the China market remains a high priority for market development.
For further information, contact Tony Halstead, (202) 720-4185.