Wartime food balance in Ukraine. Part 2.1 Formation of domestic consumption. Oilseeds and by-products

Source

APK-Inform

17191

Part 2. Formation of domestic consumption
2.1. Oilseeds and by-products

Currently, the functioning of processing enterprises in Ukraine depends primarily on safety, proximity to the front line and, directly, hostilities. According to this criterion, oblasts can be divided into safe (western and some central), relatively safe (central and Odessa oblasts) and dangerous (eastern and southern). Since the beginning of April, Kyiv, Chernihiv and Sumy oblasts can also be considered relatively safe, but the work in these oblasts is significantly complicated by the consequences of the war: damage to infrastructure and, above all, mining. After demining the planting here looks a little more optimistic, while the activities of the oil industry future is unlikely to resume in the near due to significant damage to roads and disruption of the supply chain.

Stocks and losses

As of March 1, 2022, about 45% of the sunflower seed, 27% of soybean and 32% of rapeseed stocks were stored in areas under continuous hostilities. Given the significant damage to infrastructure, some of these stocks may be lost.

Given the food security of Ukraine, this share is not critical. The stocks of oilseed and processing facilities located in regions without hostilities will be enough to cover the domestic needs this season. Taking into account the expected reduction in domestic consumption of oilseeds and by-products, the carry-over stocks may reach record highs.

The situation is the least critical on the rapeseed market, as the main sales happen in the first half of the season and rapeseed stocks are traditionally minimal in March.

In addition, some oblasts were liberated in early April. It is not yet possible to estimate the level of losses there, but the total volume of stocks may be revised upward in the near future.

Domestic processing of oilseeds

Traditionally, Ukraine processes 75% of its domestic supply of oilseeds, primarily thanks to the well-developed infrastructure of the oil industry, which is export-oriented due to the relatively low share of domestic consumption of by-products.

Sunflower seed has the highest share of domestic processing of the total production volume. Sunflower seed segment has the main processing capacity of about 22 mln tonnes per year, excluding pre-war projects and oil mills in villages. On average over the last 10 years, the sunflower seed processing rate was 97-98%. However, there is a clear trend of dependence of oil production on exports. With blocked ports, the volume of sunflower seed processing will decrease significantly this season and will depend on domestic demand and capacity of western borders.

APK-Inform forecasts sunflower seed processing to decrease to 10.7 mln tonnes in 2021/22 MY, the lowest in 7 years.

According to the updated estimates of APK-Inform, for the first half of 2021/22 MY about 8.3 mln tonnes of sunflower seed have already been processed (-1% y/y). In September-January 2021/22 MY about 7 mln tonnes of sunflower seed (-3% y/y) was processed, and about 1.3 mln tonnes was crushed in 24 days of February.

Thus, in March-August 2021/22 MY, provided that the blockade of ports continues, no more than 2.3-2.4 mln tonnes of the oilseed can be processed. But again, this figure is calculated taking into account domestic consumption of sunflower oil and relatively stable exports of oil through the western borders. If the exports are complicated or do not meet previous expectations, the volume of sunflower seed processing will be adjusted.

It should be noted that further processing of sunflower seed will depend on developments in Ukraine. But given the fact that a significant number of large processing plants are located in the southern part of the country (40% of total processing capacity in Ukraine), where there are some of the biggest military clashes, a significant resumption of processing is not expected in the near future.

Thus, with the resumption of processing plants in the safest areas in the west and partly in the center of the country, a total of about 400-600 thsd tonnes of sunflower seed can be processed per month, which is more than enough to meet domestic oil demand and partially resume exports.

This is calculated without Odessa, Dnipropetrovsk and Poltava oblasts (28% of processing facilities in total), where no fighting is taking place, but they are close to the front line, as well as without oblasts that were recently liberated and have significant infrastructure damage.

According to rough estimates and depending on the type of processing and the level of loading of the enterprise, it is about 160-250 thsd tonnes of sunflower oil, which is more than enough for domestic consumption. According to our estimates, since the beginning of the current season, the monthly volume of sunflower oil domestic consumption fluctuated between 31-45 thsd tonnes (consumption by the population and fat plants).

But given the current realities and the fact that the monthly domestic oil consumption will decline primarily due to the migration of population, the sunflower seed processing rate will balance somewhere between the volume of sunflower oil exports through western borders in the pre-war period and the maximum capacity of the western border checkpoints, taking into account the domestic demand. Of course, logistics, the availability of fuel, the willingness of farmers to sell sunflower seed as well as the willingness of processing companies to return to work will remain the significant problems.

As to the sunflower seed processing next season, it is difficult to predict, as it is impossible to predict the further development of the war and the scale of the destruction. Currently, we have a very optimistic forecast. In 2022/23 MY,  sunflower seed processing may be restored to about 13 mln tonnes, provided that the capacity of the western borders will be increased, as Ukrzaliznytsia reported, and the war will not spread to new areas.

As to the soybean segment, traditionally, the volume of domestic processing is smaller than exports (the share of domestic processing before 2021/22 MY averaged 43%). Crushing volumes mainly depend on domestic consumption and exports of soybean meal. Due to the blocking of ports, the soybean processing will decrease. At the same time, the main soybean processing capacities are concentrated in the western and central regions of Ukraine, that allows to cover fully the domestic demand for soybean meal.

According to APK-Inform, in September-February of the current season, about 890 thsd tonnes of soybean were processed in Ukraine, up 30% y/y.

When the war began, trade was suspended virtually across the country. It began to resume during the first week of March as processing companies returned to purchases.

Since March, soybeans are mostly processed for domestic needs and mainly in non-combat areas. Market participants note that they are facing difficulties with transport, drivers, sales channels, accumulation of raw materials, etc.

According to our estimates, about 400-450 thsd tonnes of soybean can be processed until the end of this season under the condition of normal operation of enterprises in central and western Ukraine, taking into account domestic demand for meal as well as partial recovery of exports. However, the forecast of  domestic demand can be adjusted due to its higher prices compared to sunflower meal or grains.

Thus, the volume of domestic soybean processing in 2021/22 MY may be reduced to 1.3 mln tonnes (-11% y/y), which may be the minimum for the last 4 seasons.

At the same time, in 2022/23 MY, the decline in soybean processing may continue if the ports remained blocked.

As for rapeseed, traditionally this crop is processed domestically in very small volumes (12% of crop) and mainly in the first half of the season. Thus, there were no adjustments to the balance of rapeseed for the current season. Regarding the forecast of domestic consumption for the new season-2022/23, no significant changes are expected. The main processing capacities are located in relatively safe areas. The existing capacities significantly exceed the traditional volume of rapeseed processing. However, the final volume of processing will depend on the demand for rapeseed oil on the foreign market and the capacity of available export routes.

Consumption: population and food needs

Consumption of edible oils (sunflower, palm, soybean, rapeseed, etc.) in Ukraine until 2021/22 MY did not exceed an average of 9% of the total supply of these products within the country (production + imports).

As a result of war in Ukraine sunflower oil consumption is expected to decline sharply. At the same time, it should be noted that it is the second but more significant reduction in domestic oil consumption over the past 10 years.

Thus, until 2014/15 MY this figure totaled 550-530 thsd tonnes but due to ATO in eastern Ukraine, migration of residents from the region and significant restriction on trade with parts of Luhansk and Donetsk regions, as well as the Autonomous Republic of Crimea, consumption in the country as a whole decreased by almost 13%. Since 2015/16 MY, domestic consumption of sunflower oil in Ukraine for the season averaged 7-8% of total production of this product, or about 440-460 thousand tons. The bulk of sunflower oil production was exported.

The second wave of a more significant reduction in household consumption, as well as the use of the product for further processing, most likely, we will see at the end of this season.

The main reason is the migration of Ukrainians because of war. According to updated UN data, 4.44 million people left Ukraine at the beginning of April. At the same time, although mass emigration of Ukrainians abroad is no longer observed, internal migration continues from the eastern regions to safer central and western parts.

According to official sources, the number of internally displaced persons has risen to 6.5 million since the start of war. Some experts believe this number to be slightly higher, but the fact that it will affect the distribution of SFO consumption in the regions and the indicator as a whole in the country is clear.  

At the end of February and in the first half of March this year the domestic market was in high demand for sunflower oil, which will increase consumption in these months, but according to our estimates, domestic SFO consumption in Ukraine in the current season in general will decline year-on-year and by the end of 2021/22 MY will be about 400 thsd tonnes (-13% y-o-y).

With the continuation of hostilities approximately within the limits observed at the beginning of April, in 2022/23 MY this figure may decline to 383 thsd tonnes (-4% compared to 2021/22 MY and -16% compared to 2020/21 MY), which can be a minimal figure for many years. However, domestic consumption can be revised, which will be affected by the duration of war, the improvement/deterioration of the situation in the country and, as a result, the further migration dynamics of Ukrainians.

The use of other vegoils inside the country is considerably lower compared to sunflower oil.

In particular, soybean, rapeseed or flaxseed oils can be used in food industry (to produce salomas, mayonnaise or other products), paint, biodiesel and other industries, but domestic consumption in 2021/22 MY in average totaled 22 thsd tonnes of soybean oil (8% of total production) and 1.4 thsd tonnes of rapeseed oil (1% of production). The main volumes of production were usually exported.

It is worth noting the situation with tropical oils imported to Ukraine. For example, on average about 170 thsd tonnes of palm oil are consumed per season. But in the future, this figure will depend on the capacity of the western borders, as the main import routes are currently blocked.

In general, in 2021/22 MY and 2022/23 MY dome reduction in domestic consumption of vegetable oils is expected but an increase in percentage due to a significant reduction in production.

Feed consumption

Oilseed meals are one of the main feed components for livestock and poultry. According to APK-Inform Agency, by 2021/22 MY in Ukraine about 22-24% of the total production of the three main oilseed meals were used in fodder production during the season. In particular, 1 mln tonnes of sunflower meal/cake (17% of total production), 650 thsd tonnes of soybean meal/cake (57% of total production) and only 6 thsd tonnes of rapeseed meal/cake (3-4% of total production). Vegetable oils, including soybean oil and others are also used in small quantities in fodder production.

At the same time, it is the livestock industry that has found itself in the most difficult situation as a result of significant hostilities in more than 9 regions of Ukraine. In terms of shutdown of oil extraction plants almost all over the country, including due to their high explosiveness, livestock enterprises in relatively safe regions faced difficulties in purchasing protein feed. At the same time, in dangerous regions this problem is more acute due to the lack of the possibility of uninterrupted supply of feed. At the same time, there are reports of enemy shelling of livestock farms.

Currently, information about the loss of livestock in the liberated oblasts is being clarified, but the most critical situation is observed in Kharkiv, Donetsk and Luhansk oblasts, where the military activity continues and is expected to intensify in the near future, as well as in Zaporizhia and Kherson oblasts, which are still occupied. 

As of January 1, 2022 these areas accounted for about 12% of the total number of cattle, 14% - pigs, 9% - poultry and 16% - sheep and goats. Possible livestock losses in these areas will be reflected in the consumption if meal (cake) by the end of the current season.

According to our preliminary estimates, the use of the three main meal in the 2021/22 season could be reduced to 1.35 million tons, which is 12% lower y-o-y. It should be noted that the reduction in the consumption of meal in feed production will also contribute to their inaccessibility in hazardous and occupied areas and the partial replacement of more readily available grain, the stocks of which are much larger and the price is more affordable.

With the continuation of hostilities in Ukraine, in the next season the trend of reducing the use of meal (cake) in fodder production may continue. According to our expectations, this figure may become the lowest since 2012/13 MY.

Seed fund

Seed material is another article of domestic oil consumption. It should be noted that the share of this industry is very small - only about 1% of the total supply of oilseeds. At the same time, in terms of crops, the situation is somewhat different.

Thus, the largest share of seed material is observed in the soybean sector - about 4.1% of the total supply (average for the previous 5 seasons). At the same time, almost 100% of the seed volume is of Ukrainian origin.

In the sunflower sector, this percentage does not exceed, as a rule, 0.3% and 0.4% in the rapeseed sector. However, on average 69% of the total volume of sunflower seeds and 37% of rapeseed are imported.

Factors influencing further domestic consumption

Further domestic processing of oilseeds in Ukraine will depend on many factors, among which the most important are:

  • further development of the situation in Ukraine due to Russia's military aggression;
  • readiness of Ukrainian plants to resume operations in regions where possible;
  • availability of professional staff;
  • conducting a planting campaign and actual harvest areas that will shape the 2022 harvest;
  • the pace of recovery and the level of exports of oilseeds by-products;
  • logistics.

At the same time, domestic consumption of vegetable oils will depend, first of all, on the further migration of Ukrainians and the work of oil and fat plants.

At the same time, the internal consumption of oilseed meal will depend primarily on such factors as:

  • regional distribution of processing and logistics issues;
  • demand and prices on the domestic meal market and related grain markets;
  • the level of losses and the rate of recovery of livestock in the livestock sector;
  • availability of products in dangerous and occupied areas.

 

Wartime food balance in Ukraine Part 1. Formation of planted areas and production structure

 

Wartime food balance in Ukraine: Part 2. Formation of domestic consumption 2.2. Grains and by-products

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