COMPREHENSIVE NEWS & ANALYSIS OF THE WORLD PROCESSING TOMATO MARKET

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1 ISSUE N 11 NOV. 8, 04 TOMATO MARKET REPORT COMPREHENSIVE NEWS & ANALYSIS OF THE WORLD PROCESSING TOMATO MARKET Europe A record pack that will turn into unprecedented stocks of unsold tomato paste stocks! California Prices also under pressure after a huge pack! Turkey Processors less active on international markets! China Huge production and lower prices despite resistance from Chalkis! Breaking News A second Chinese tomato processor in trouble? Key number 25.4 % : the world production increase between 2003 and 2004! The Tomato interview Mr. Zhang Guoxi, General Manager of Tunhe from China! (now online) Our Sponsor Rest of the world Iranian crop is 15 to 20 % lower than in 2003! Crops also reduced in new EU countries! Brazilian pack has reached a record 1.3 millions MT.! LOW COST TRANSPORT FOR FOOD D PRODUCT 1

2 Note : Exchange rates as of November 8 th... are 1.28 $ and per Euro. Europe : Record pack! Thanks to record yields in many European regions, the E.U. production has reached 11.1 millions MT. of fresh tomatoes, 27,3 % (2.39 millions MT. more!) than in 2003 when the previous record was 9 millions MT. Italy, EU largest tomato processor, has indeed broken its record with 6.3 millions MT. (more than a million MT % - above 2003 crop) of fresh tomatoes processed by factories. Both North and South Italy have enjoyed very favourable climatic conditions which permitted a very long crop, up to October 15 in some cases! Outputs of peeled tomatoes, diced and crushed tomatoes as well as of low concentration products (pizza sauce, passata ) in all kind of packaging are larger than expected. Not to mention paste many factories, especially in the North have processed much larger volume than planned : paste is indeed the easiest tomato product to process and the most marketable one, not to say that the large flows of tomatoes delivered to the factories and the limited availability of packaging (bags and drums) was forbidding processors to go for any other alternative. More precisely, and in response to the Chinese threat, most of this unsold paste is 28/30 % Cold-Break, Hot-Break demand being quite limited. Spain, the second largest processor has also broken its record with a total volume of 2.25 millions MT., here also a 25.5 % increase from 2003, about half a million MT. more. The output should have been greater if heavy storms had not affected the plantations in Mijadas area and adverse weather in August had not reduced our field yields explains a large local packer from Extramadura. Nevertheless, this very large production also turned into huge stocks build-ups, mainly in aseptic tomato paste and, to a lesser extent, in aseptic diced tomatoes. Also to notice is the very low sales achieved by some of the factories; I know a Spanish processor who has not sold 30 % of his production yet confirms a large European trader! With 1.25 millions MT. (+31.5 %) fresh tomatoes being processed, Greece is also close to its record (1.294 millions MT. back in 1996) when the average crop of the last 3 years was 0.91 millions MT. Very large stocks of uncontracted paste, diced and also low concentration products are here also reported at several processors. Portugal has achieved a record pack of 1.1 millions MT., up 22.2 % from 2003 when previous crop never reached the 1 million MT. limit. Most of these extra tomatoes have been also processed in paste! Only France has had a reduced crop (0.22 millions MT., down 6.25 %) but with a marginal effect on European markets. We did not expect all regions to enjoy such a good weather after 2 difficult crops, especially in Italy; the European figure has schocked everybody, even the most optimistic pessimistic? analysts summarizes an Italian processor. We remind you that Tomatoland was already forecasting a 10 millions MT. EU crop as of August 25 and a 10.8 millions MT. European 2

3 volume as of September 20, very close to the unexpected final figure. As mentioned in our previous market report, one should still note that the factory yields have been overall low, one of the lowest in recent years in Spain as expressed by a local processor; the final volume of paste and other tomato products is therefore not as large as one could expect by only looking at the crop size. Nevertheless, the volume of finished products achieved during this summer is historically high, at least 20 % higher than the previous record. Moreover, as explained above, the quantity of paste, mainly aseptic 28/30 % Cold- Break, produced by European factories is considerable. A large part of the extra volume of fresh tomatoes harvested in Europe has been processed into aseptic tomato paste, giving an unsold inventory of at least MT. of finished products (equivalent 28/30 brix) according to concordant sources! The second hot item is canned peeled tomatoes as most South Italian factories had no options but to process it. The situation in retail products is obviously different as the demand is more elastic than it is for industrial commodities moderate an Italian broker. Stocks of diced and crushed tomatoes are also large when compared to a standard year but not really alarming except for isolated packers, mainly newcomers on the market. A similar situation is found for low concentration products where most of the production is made on contract basis. Except for some small demands expressed during the recent SIAL food exhibition in Paris, the market has been extremely quite with sellers rushing to any business opportunity. Prices have inevitably fallen to extremely low levels; moreover, we do not really have market prices as exchanges are very scarce explains a UK trader. The rare deals reported to Tomatoland have been done between 480 and 520 Euros (615 / 665 US $ / 360 GBP) per MT. ex-factory for aseptic CB 28/30 % paste from Spain for crop to crop deliveries. Greek, Italian, French and Portuguese processors are offering similar prices also on exworks basis. On delivered basis, we obtain around 550 Euros (700 US $) per MT; for continental destinations, about 530 Euros (680 US $) per MT. on FOB main South European ports (Lisbon, Thessaloniki, La Spezia ) and about 395 GBP (570 Euros) per MT. for UK destinations. This is below costs but the selling opportunities are very rare and, if you miss them, you may find yourself with your paste in the warehouse next August when the new crop arrives explains a Spanish seller. Some analysts predict further price drops in coming months as some processors will need to cash in some money before negotiating the credit lines for the 2005 crop. Although available in much smaller stocks than 28/30 % paste, 36/38 % aseptic paste is also available at attractive prices, between 620 and 650 Euros (790 / 845 US $ / 460 GBP) per MT. on ex-factory basis from Spain, Greece or even Italy. Delivered prices are 680 Euros (870 US $) per MT. for the continent, 660 Euros (845 US $) for FOB port and 475 GBP 3

4 (690 Euros) per MT. for UK. The market is saturated and this unique situation pushes prices down even for items with more reasonable stocks like 36/38 % explains a large trader; not to mention the pressure from Chinese products on the so called triple paste (see below for more details). This is also true for aseptic diced tomatoes and low concentration products such as pizza sauces even if available quantities are also more limited than for paste. With most factories that process these products having some extra quantities, it is easy to find any kind of products and prices are also down from September. Diced tomatoes in regular juice is now available between 290 and 310 Euros (370 / 395 US $ / 215 GBP) per MT. ex-factory Spain. Italian and Greek prices are higher with local factories feeling more comfortable to find customers for these extra quantities before new crop; around 330 Euros (420 US $ GBP) / MT. ex-works. We do not expect these prices to drop much further as sellers have less pressure than for paste except for isolated cases. Italian crushed tomatoes is also available in significant quantities below 300 Euros (385 US $ GBP) per MT. FOT North Italy. A further drop is expected. Pizza sauce 10/12 % also in aseptic bags in drums is currently available at 300 Euros (385 US $ GBP) / MT. ex-works Italy; add about 30 Euros for 12/14%. We do not foresee significant prices drop for these products in the future. Last, pls. also note that paste in 5Kg. cans or 20Kg. aseptic bag in cartons are also available in large volumes; as well as natural or spiced pizza sauce in 5Kg. cans. The market for retail tomato products, mainly paste, passata, peeled and chopped tomatoes is also badly suffering the over production. Although a good part of the European retail business has been done before news about the crop volume came out, the new business is done at very low prices. Paste in 1/2Kg. can (440 g. NW) is currently available from South Italy below 7 Euros (8.95 US $ GBP) per carton of 24 units, down 15 % from a month ago! 880 g. cans are available at the same price for cartons of 12 units also on ex-works Napoli area. Peeled tomatoes in 1/2Kg. can is currently offered below 4 Euros per cartons of 24 pieces ex-factory but large processors try to resist such very low prices. Passata and polpa prices are of course following the same trend downward; one can also expect the prices of tomato based finished products such as ketchup and spaghetti sauces to also decrease in coming weeks or months. USA : Prices also under pressure! Californian deliveries of fresh tomatoes have reached millions short tons (10.6 millions MT.), the second largest crop ever, only second to the 12 millions short tons of This is an increase of 26 % from 2003 and 9 % from the past 3 years average. This volume will also here lead to a large carry-over stock before the 2005 crop. Based on the last reference period (June 2003 / May 2004) consumption, the inventories as of June 1 st could exceed 4.5 millions short tons (more than 4 millions MT.), up 28 % from 2003 and equivalent to more than 5 months of 4

5 theoretical consumption. Local processors do not seem to be all in similar situation. When some are reporting to be sold out, others admit large stocks of unsold products. Like in Europe, prices are also quite unclear; local traders have indicated very low offers, below 27 cents a pound (590 US$ per MT.) ex-plant for 30/32 aseptic paste in bins. On brix basis, and helped by a very low US dollar, this is even cheaper than current European prices : on 28 equivalent basis, it gives a FOT price of 430 Euros per MT. In its last interview during the early crop period, Mr. Chris Ruffer was declaring to us that no processor can make money in California market conditions ; current prices should not help them for any recovery. Moreover, if in 2003 Californian processors manage to export some quantities because of the European and Chinese shortages, it will be much more difficult to achieve such overseas sales this year. TURKEY : reduced activities on international markets! Turkish final figure has been given by SID, the local processors association : 1.75 millions MT., down 12.5 % from the 2003 record pack but still a high volume when compared to last 5 years average. Nevertheless, following the troubles of Merko, now on its way to settle its financial situation according to management, Turkey has processed much less exportable paste than in As said in our previous reports, aseptic paste to be shipped abroad hardly exceeds MT., down almost 50 % from last year. Most of this paste has been already contracted and volume still for sale are limited according to a local packer. One can still easily find products for sale, both 28/30 % and 36/38 % paste as well as diced tomatoes. Local processors also expect to achieve sales locally as the consumption of domestic food industries keeps on increasing year after year. Domestic sales have been satisfactory so far as explained by a local packer but prices are already under pressure. Local processors have achieved traditional sales of canned paste to Russia, Eastern Europe, Turkish Republics, Eastern Africa but could face China on these markets soon (see below). Export prices are slightly lower from a month ago at 660 US $ (515 Euros 355 GBP) for aseptic 28/30 % on FOB Izmir port basis and 750 US $ (590 Euros 410 GBP) for 36/38 %. Thanks to a lower US dollar (against the Euro) and a declining Turkish Lira, Turkish prices are becoming more competitive, close to European ones for double paste and even cheaper for triple paste. Diced prices remain unchanged around 300 Euros per MT. on FOB basis but demand is very slow at this stage as reported by a local seller. Canned paste prices are also lower than before with 1/2 Kg. Can (440 g. net) offered at 9 US $ ( ) per carton of 24 pieces and 1 Kg. can (860 g. net) available at 8.4 US $ ( ) per carton of 12, both on FOB basis. CHINA : Huge production and new trouble for a processor! 5

6 Various Chinese sources confirm a total output reaching MT. of tomato paste (China is not recording the volume of fresh tomatoes), equivalent to 4.4 millions MT. of fresh tomatoes, up 57 % from Some local professionals including Mr. Zhang Guoxi, Tunhe s general manager, are giving a higher volume at MT. of paste, equivalent to 4.7 millions MT. of fresh materials (read more in its exclusive interview on tomatoland.com). Tomatoland sticks to its Oct. 26 production estimates at 4.4 millions MT. (see our World Production Estimates in the Production Data folder of our homepage for more details). After 2 years with a production lower than expected and most factories sold out very early in the season, processors had contracted very large acreage of tomatoes with farmers both in Xinjiang, Inner Mongolia and Gansu. Cotton, the main competitor of tomatoes in the fields, enjoys much lower prices and was no obstacle this crop. Moreover, just like most of the tomato growing regions, China has encountered a very favourable weather allowing good yields and a long crop. This production can be split in 3 large volumes : around MT. of paste are in the hands of Tunhe (Cofco see our previous reports), MT. belongs to Chalkis and the balance, MT., was processed by smaller players (Tianye with about MT. and then smaller volumes for Inner Mongolia Bameng Fuyuan or F20, Y29, X4 ). This volume will bring more pressure to Chinese processors, especially to smaller ones whose products are poor in quality» explains Zhang Guoxi from Tunhe. The smaller players are indeed the ones currently taking prices down when Chalkis and Tunhe both try to resist lower prices with an unofficial «limit down» at 480 US $ ( ) FOB Tianjin per MT. for 36/38 % aseptic tomato paste. «It is today possible to get 36/38 % tomato paste at 450 US $ per MT. for immediate shipment and payment» indicates a large EU trader. The cheapest offers actually experienced by Tomatoland for 36/38 % is 460 US $ ( ) per MT. FOB, equivalent to 540 US $ ( ) per MT. CFR Main European ports, or 620 US $ ( ) on CFR Duty Paid Basis. Lower prices, especially in Euros and Pounds, can be expected in coming weeks and months but a real collapse, if any, can only come if one of the two large players follow the trend downward. This will happen sooner or later as Chinese main customers, especially South Italian repackers, are resisting earlier contracted prices, around 480 US $ per MT. predicts a Chinese trader. 28/30 % aseptic paste is currently offered at 430 US $ ( ) per MT. FOB Tianjin port, giving a CFR Europe Duty Paid price of about 520 US $ ( ), again very competitive when compared to EU market prices. In addition to the price disagreement between the main Chinese players and their largest customers, another conflict recently started : Chalkis, China s second largest processor, has recently set up a state of the art canning factory in Tianjin, the export port for Chinese tomato paste. Up to 8 processing lines could be installed in this 6

7 facility and Chalkis management is clearly aiming at reducing its exposure to the very fluctuating industrial products market and at increasing the value added of its activities. By doing this, they will compete with their customers in Italy, Middle East and in some other regions explains a large Italian broker; this is no good strategy and they will have great difficulties to succeed in these new markets with no experience he also added to Tomatoland. The fight for cans has started and other Chinese will follow Chalkis warns a Chinese trader; Repackers from South Italy and other areas will be in trouble, so will be Turkish exporters of cans he also predicts. Price wise, Chinese companies can take great advantage of the lower US dollar, cheaper steel prices and easy and cheap access to paste. Italians can benefit better productivity, lower can making costs and, in some cases, cheaper freight rates. At this stage, FOB prices from China are between 10 to 20 % cheaper than Italian ones in Euros terms depending on can sizes but Italians will most probably reduced their offers thanks to cheaper Chinese paste (see more detailed prces in the next October World Price Index to be published shortly on tomatoland) It is still very early to make any clear projections but we now have new rules in the canning business and, as usual, Tomatoland will try to inform you accurately about the market situation. Last, several Xinjiang sources are informing Tomatoland about severe legal and possibly financial problems for Tianye company, China third largest processor with a production exceeding MT. of tomato paste per year. Like in Tunhe s case, it seems that these troubles are linked to some wrongdoings on the stock market from Tianye top management. We remind you here that Tianye tomato processing is part of a Xinjiang based large conglomerate also involved in plastics and chemicals. Tomatoland could not get any confirmed information from Tianye at this stage or any detailed information about the extent of the problem. We shall keep you posted shortly. SOUTH AMERICA : Brazil announces a record pack! «The Brazilian processing tomato production was, in average at 1.1 million metric ton from 2000 to 2004, and the best production was, at 1.25 million metric ton, in New high yielding hybrids and greater use of inputs and technology are boosting productivity of processing tomatoes particularly in the Center-West region, the area known as the cerrados. Yields in this area are highest in the country at about 76 tons/ha compared to 65 tons/ha in the Southeast region. Explains Mr. Paulo César Tavares de Melo, one of the best expert of the Brazilian tomato industry. The latest estimates for Brzil now reaches over 1.3 millions MT. of fresh tomatoes, a new record. The total output is currently consumed locally but Brazil couls start exporting if local growers and processors keep on improving their technics as they did since This is no good news for Chile. Not only is Chile loosing its export market there but it could also face new competition in South America, one of its privileged market. With its plantations already planned, Chile will also 7

8 have to face the very difficult market conditions described above. OUR CONCLUSION : the bottle is full! With North America up 25 %, Europe up 27 % and China up 57 % from 2003, the world production is exceeding 34 millions MT. of fresh tomatoes, almost 7 millions MT. above last year s output! This extra production corresponds to 1.2 millions MT. of tomato paste 28/30% equivalent. This will inevitably lead to a huge carry over stocks before next crop. According to our estimations, the world stocks of tomato products as of June 2004 was around 6 millions MT. of fresh tomatoes but could almost double by June 1 st. 2005! «How did this happen?» asked us a Turkish tomato processor during a recent meeting at SIAL ; «Most processing regions had a fantastic weather» replied an Italian packer. This obvious answer lies a more complex reality : - following 2 years of relatively poor climatic conditions and virtually no carry over inventories, processors have contracted record volumes with farmers in China and Italy; so did Californian packers to a lesser extent; - with an increased processing capacity exceeding MT. of fresh tomatoes this crop, Spain had also contracted a much larger volume than in previous year; - no penalty (subsidy cut) can be decided for the 2005 crop for exceeding the EU quota in 2004 as the subsidies have been fixed for 2004 and 2005; not to mention the possible change in the EU subsidy system from 2006; - following significant improvement in field yields, other processing countries such as Brazil and Tunisia manage to achieve very large or even record crops; - and, as said above, many regions enjoy very positive weather conditions that allowed very high agricultural yields as well as long crops. The bottle is full! summarizes a large Spanish packer to define the difficult market conditions. Processors with unsold stocks have indeed little opportunities to sell it off before the next crop. Price is not the main issue as demand is not really elastic, at least in industrialized countries he also explained. Whether to accept ridiculous prices, as described by a Greek processor, or to take the risk to keep stocks till next crop is the difficult choice to make. The second option could only be the right one if world tomato industry manage to drastically reduce its production in Some processors might not even afford to take that risk if required to cash in some products to secure the financing of the next crop. We could see several companies going down in coming months in Europe but also in other regions even predicts an Italian professional adding that with such stocks, we are heading for at least 2 years of difficult times. Also foreseeable is the price reduction of second stage finished tomato products such as ketchup or spaghettis sauces, a move that could take longer to overcome. Despite great efforts by the various national processors associations, the AMITOM (Mediterranean Tomato Processors Association) 8

9 and the WTC (World Tomato Council), the level of exchange of information among processors, even within one country, or among associations remain very limited. Not to mention the specific problems in Spain and China where processors refuse to gather in the same association. Also to blame, except in California, is the absence (or worst the unavailability) of reliable tools to record both planted acreage and actual volume harvested in tomato growing regions. This situation often leads to poor decision taking by growers and processors as well as poor planning of the production. Another problem faced by the processing tomato industry, especially in Europe, is its lack of concentration despite some mergers and factories closings in recent years. This situation forbids industry players to enjoy comfortable revenues when market conditions are positive, like in past 2 years, and to better resist an overproduction situation like we are facing one. The likely change of the EU subsidy policy in coming years should speed up the necessary concentration process. The Tomatoland Information Team 9