Fats and Oils

SIC 2070

NAICS 311225

Industry firms extract and process a variety of fats and oils, mostly for use in human foods and animal feed. Major production categories include cottonseed

oils, soybean oils, other vegetable oils, animal fats and oils, and margarine, shortening, and related products. (Production of butter, however, is not included under this topic.)

INDUSTRY SNAPSHOT

In the early 2000s, global supplies of fats and oils were sufficient to meet steadily increasing world demand. According to analysis of the Food and Agricultural Organization (FAO) of the United Nations, consumption of oils and fats was expected to grow by about 5 percent in 2005, while consumption of oilcakes and meals (used for livestock feed after oil has been extracted from seeds by pressing or grinding) was expected to increase by 4 percent. World consumption of oilseeds rose steadily through the 1990s, reaching 347 million metric tons (mmt) in 2004. Of this total, about 288 million metric tons (mmt) were expected to be crushed for oil or oilmeal.

Growing demand in developing countries was expected to account for more than 60 percent of this increase. Soy and palm oil consumption was expected to increase the most, while use of sunflower seed oil was likely to decrease. Use of non-edible oils was also expected to rise, most notably for the production of biodiesel fuels.

Global trade in oilseeds and oilseed products experienced astronomical growth in the late twentieth century, due largely to expanded production of soybeans. Trade in oilseeds, cakes, and meals increased almost 900 percent from 1964 to 2004, while the global market for vegetable oils during the same period grew by a stunning 1,800 percent. While trade slowed in 2004, it was expected to pick up again in 2005, rising by 5 to 6 percent. Most of the increase, according to the UN's Food and Agricultural Organization (FAO), would be attributed to palm oil, with trade in soybean and rapeseed oils also increasing. The market for sunflower seed and ground seed oils, however, was expected to shrink. Although the United States and the European Union have historically led world production, much of the industry's recent expansion came from developing markets in Asia. India, Indonesia, and Malaysia, in particular, are they expected to continue to lead worldwide market expansion, both in terms of production and consumption. By the late 1990s, Malaysia had already become the world's largest edible oil producer because of its prodigious output of palm oil. By 2005, the world's seven top exporters of oils and fats accounted for 82 percent of global import needs, and the FAO expected this concentration to continue.

Consumers worldwide continued to shift from high-cholesterol animal and marine oils to lower-cholesterol vegetable oils. While vegetable oil output

increased 60 percent from 1970 to 1980, animal and marine oil production only grew by 9 percent and actually started to decline in the 1990s. In addition,

consumers also began to bypass oils high in saturated fat, such as tropical oils, and choose those with low levels of saturated fat, like olive and canola

oil. Consumers' desire to have low-fat and low-cholesterol alternatives for their diets was a major motivator in research efforts. Americans, in

particular, wanted to reduce the fat in their diets without sacrificing taste or texture. Consumers also wanted to avoid eating trans fats, often used to cook French fries, chips, and other popular snack foods, and also used in the production of baked goods such as cookies and muffins. Manufacturers responded by announcing changes in their ingredient lists. Frito Lay, for example, announced in 2005 that it was the first U.S. company to completely eliminate trans fats from its major snack brands.

ORGANIZATION AND STRUCTURE

Most fat and oil products (over 60 percent) of this industry are produced and consumed domestically. Although many nonfood uses for fats and oils have been discovered, the vast majority (about 80 percent) of the industry's production in the early 2000s was still for human or animal consumption. In the United States, for example, salad and cooking oils accounted for 50 percent of all vegetable oil production. Another 40 percent is used in baking or frying, and almost 10 percent is used to produce margarine. Notwithstanding the negative health connotations associated with consumption of fats and oils, these substances constitute one of the three primary nutrients. And since fats carry more than twice as much energy as the other two groups, proteins and carbohydrates, they have been characterized as "nature's storehouse of energy." (A gram of fat contains nine calories compared to four calories per gram in carbohydrates and proteins.) In many cultures, the consumption of rich fatty foods is considered a sign of affluence. Not surprisingly, per-capita consumption of edible fats and oils in developed countries outstripped that of developing nations by a three-to-one margin. In developing countries, according to the U.S. Department of Agriculture (USDA), for every 1 percent increase in income, consumers will spend an additional 0.55 percent on fats and an additional 0.40 percent on oils. By the early 2000s, per-capita consumption of edible fats and oils in both developed and developing countries was on the rise, growing from 22.7 kg and 7.2 kg respectively in 1980, to 28.4 kg and 14.6 kg respectively by 1996. The FAO projected that world consumption of oils and fats would grow by 2.8 percent annually in developing countries (compared to 1.8 percent growth in developed countries) through 2010. Developing countries were expected to capture 62 percent of the market during that period, up from a 60 percent share in 2004.

Industry output can be classified according to its sources (animal or vegetable), its products (mealcake, fat, or oil), and its uses (food or nonfood). Fat and oil meal cakes can be consumed as fodder by animals or used as fertilizer. In the mid-1990s, vegetable oil cakes and meals constituted about 37 percent of the world's total output for the fats and oils industry. Cottonseed oil, soybean oil, and vegetable oil mills produce oil for purposes other than human consumption such as animal feed. Oil from these mills only constitutes about 1.3 percent of the world's total fats and oils output. Other businesses produce animal and fish mealcake, greases, and fats. The mealcake can be used as fodder or in manufacturing but not as food for humans. Crude animal fats and vegetable oils are processed for human consumption by manufacturers and include shortenings, table oils, margarines, and other edible fats and oils. Production is subject to the vagaries of the seasons, the weather, and demand.

The markets for cottonseed oil, soybean oil, and vegetable oil mills are driven by the highly volatile demand for animal feed. Since livestock producers have a wide variety of feedstock from which to choose, they are very sensitive to price. By extension, demand for oil cakes and meals is also driven by the amount and variety of demand for meats. The primary factors driving demand for edible fats and oils are price, consumer health concerns, product innovation, and international trade regulations. Heavy outlays for advertising and promotion of the top branded edible fats and oils also characterize this industry segment. These concerns have influenced the evolution of large consumer products companies that have the financial wherewithal to compete effectively.

There are three basic steps in the production of fats and oils: growing, processing, and refining. Some companies only process and refine oil, while others are vertically integrated and perform all three tasks. Although most modern processors use solvents to remove oil from seeds, they are nonetheless referred to in the literature as "crushers," in reference to the historical pressing method. Refiners, who process vegetable oil or crude animal fats, use techniques such as bleaching, filtering, deodorizing, and/or hydrogenating to extract oil. Many companies in this industry group are subsidiaries or divisions of major consumer products conglomerates.

Nonfood oils

Cottonseed oil mills. This industry segment includes companies that

manufacture cottonseed oil, cake, meal, and linters, or process purchased cottonseed oil into forms other than edible cooking oils. In 2004 global cottonseed cake output stood at 26.4 million metric tons (mmt). Production in the United States reached 1.8 mmt in 1994, but declined steadily through the late 1990s and early 2000s. In 2003, U.S. cottonseed crushings were 2.48 million short tons, a 6.1 percent decrease from the previous year's output.

Until the early nineteenth century, unplanted cottonseed was considered a health hazard because it contained the poisonous pigment gossypol. But after 1833, when the first successful cottonseed oil mill was launched, the southern United States soon became the industry's largest producer and consumer. Cottonseed was a leading product in the global fats and oils industry, but production fell steadily in the late twentieth century. In the early 1990s, rapeseed supplanted cottonseed as the second most produced oil cake in the world. Cottonseed cake constitutes the majority of this industry segment's production. It is usually used as a high-protein supplement to livestock and poultry feed. Virtually all crude cottonseed oil is refined into salad or cooking oil, but low grades of...

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