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Special Report
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):
In 1997:
In 1998:
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.
Conclusion
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
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