Limited Palm Oil Availabilities Benefitting U.S.
Soybean Oil Exports
Palm Oil Production and Trade
Palm oil is produced mainly (more than 84 percent) in Southeast Asia. Malaysia is the single largest producer with more than 50 percent of the world's production, while Indonesia follows with almost 30 percent of global production. Malaysia exports most of its production, 84 percent on average, unlike Indonesia which consumes 60 percent of its annual production of palm oil.
Palm oil is the most traded vegetable oil in the world, capturing 40 percent of global trade. A distant second is soybean oil with around 22 percent of global trade.
Palm oil presents a unique challenge for analysts of vegetable oil markets in their efforts to perform a price analysis. This challenge results from the two very distinct demand functions that palm oil faces. Crude palm oil is processed into I) Palm Stearin and ii) Palm Olein.
Palm Stearin (solid at room temperature) is used almost exclusively -- with the exception of some third world countries-- for industrial uses such as in cosmetics, soaps, detergents etc. Palm Olein (liquid at room temperature) is used exclusively for food use. Those distinct uses of have also two different price elasticities for the quantities demanded. Palm Stearin is relatively price elastic, small changes in price can result in substantial changes in the quantity demanded (price and quantity move opposite ways). In contrast, palm olein is more price inelastic, its responsiveness to price movements is not as dramatic as that associated with Palm Stearin.
Price analysis for palm oil is even more complicated when we take into consideration what countries import palm oil. Developed countries (USA, EU, etc) import almost exclusively palm stearin for industrial uses as dietary habits and consumer health awareness keeps use of palm olein at minimal if not zero levels. Food use in developed countries is restricted in the confectionery industries (chocolate candy coating). In contrast, developing countries import palm oil mainly for food use. For some countries like China, India and Pakistan palm oil and soybean oil are close substitutes when it comes to food use. The single most important factor in these countries that determines use is price.
Palm oil usually trades at a discount to soybean oil, the larger the relative availabilities of palm oil the larger the discount. During the last 18 months this situation had been reversed! Palm oil traded at a premium for 26 consecutive weeks during Oct. 96 through May 97, creating an explosive situation in the pricing of vegetable oils. Although currently palm oil is trading again at a discount to soybean oil, the availabilities of palm oil continue to be at levels that the market considers uncomfortable. As a result, for the last three months palm oil prices have appreciated relative to soybean oil prices.
The problem with the supply is quite serious. The El Nino effect as well as the forest fires and haze have taken a heavy toll at the main producing countries in Southeast Asia . According to Malaysian authorities palm oil production for 1997/98 is expected to be down by 500,000 tons (from 9.0 to 8.5 MMT). Indonesia has experienced a drought for the last 13 months substantially affecting palm oil yields and production. In addition, both countries experienced increased exports in the beginning of the marketing year trying to obtain hard currency to cope with the financial crisis.
Malaysia did not try to control the increased exports and this has resulted in the reduction of stocks to very low levels putting more upward pressure on prices. Indonesia has chosen a different and very unpredictable path to restrain the acceleration of exports in order to maintain ample supplies for the domestic market. The following is a summary of actions taken by the Government of Indonesia (GOI):
March 2 Announcement that the export
taxes will be 12 percent for palm olein and 18 percent
for palm stearin after the export ban is lifted.
These actions have aggravated the world supply
situation for palm oil, although they might have helped stabilize
the domestic situation in Indonesia. Export availabilities of
palm oil in Indonesia still remain low. Stocks are extremely low,
demand continues to be strong and the outlook for palm oil
production is pessimistic.
Soybean oil production and Trade
The difficult situation that exists in the Palm oil market is affecting the soybean oil market in a very favorable way. Given the record South American soybean crops as well as the anticipated large soybean plantings in the United States during 1998, the outlook for soybean oil exports should have been very bleak. Instead the outlook for soybean oil use and exports is very optimistic for the 1998/99 marketing year.
February is the month where the vegetable oil market is accustomed to increased palm oil supplies and exports, this will not be the case for the 1997/98 marketing year. Soybean oil on the other hand is in plentiful supply and it is expected to benefit substantially. Currently palm is trading at a $20 discount to soybean oil. China is expected to continue to import soybean oil at this level of discount, as soybean oil is preferred in China if the price differential is not too large.
This was nicely illustrated in 1993/94 when palm oil sold at a
$151 per ton discount to soybean oil and China imported 1.65 MMT
of palm oil and 0.75 MMT of soybean oil. Relatively favorable
soybean oil price prospects for 1997 and 1998 point to continued
expansion in Chinese imports of soybean oil for the 1997/98 and
1998/99 years with U.S. exports likely propelled to new highs.
Reduced availabilities of palm oil, due to lower than expected production and low levels of stocks, have helped U.S. vegetable oil exports to reach record levels.
Soybean oil exports in 1997/98 are expected to reach 1.13 million tons, up more than 21 percent from last year and the third highest level in history, after 1979/80 and 1994/95.
If production of palm oil in Malaysia continues to decline and China continues its current pace of soybean oil imports from the U.S. our estimate for 1997/98 could be revised to 1.23 million tons. Sunflowerseed oil exports in 1997/98 are expected to reach almost 480,000 tons, the second highest level in history.
This trend is expected to continue into the next marketing year creating a new record high for soybean oil exports at 1.25 million metric tons.
George Douvelis and Robert Hanson
return to table of contents