the Vegetable Oil Market Today

by Dr James Fry, LMC International

to PALMEX Thailand, September, 2011
www.LMC.co.uk

Outline of my presentation today

will start by describing one of the most surprising

hanges in the behaviour of the world vegetable oil
arket, which has occurred within the past five years
his is the way in which vegetable oils have become
art of the petroleum complex, as regards pricing. I w
xplain why and how this has happened.

his has far-reaching

reaching consequences for the future
ehaviour of vegetable oil prices. In particular, while
upply-demand
demand balances do matter, they are less
mportant than they used to be in setting oils prices.
alm oil stocks are still the main driver of price
fferentials within the oils complex, and so I will

The revolution in vegetable oil pric

behaviour

roleum and vegetable oil prices. CPO was

en cheaper than crude oil per tonne.

00

00

00

00

00

00

00

Palm oil was actually less

expensive than crude oil

00

00
0
Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

etable oil prices to crude oil prices, within a

e band with vegetable oils at a premium.

1,600

1,400

1,200

1,000
800
600
400
200
0
Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

w price band, but their premium over crude

roleum has shrunk sharply in recent weeks.

2,400

2,000

1,600

1,200

800

400

0
Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

that, after a sharp correction after January,

CPO premium has settled near its average.

600

500

400

300

200

100
0

100

200
Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

major revolution in vegetable oil pricing

We can now see very clearly that there is a price ban

place, which became established in 2007.
When vegetable oil prices get too far above crude oi
correction occurs, and typically quite fast. We saw
uch a correction in 2008 and again this year.
nce the floor of the band is set by crude oil prices,
eems likely that biofuels are the key to the link.
his view is reinforced by the evidence that lauric oil
hich are distinct from the other oils and are not use
biofuels, are less closely tied to the new price ban
owever, I suppose the link could be caused by bas
ommodity speculation, and so I now turn to examin

Biodiesel demand has changed the

lance within the oil and meal secto

ahead of those for protein meal. This boosts

e reliance upon high oil-content
oil
crops.
150

250

125

200

100

150

75

100

50

50

25

0
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Oil (Million Tonnes)

300

demand for oils and meals were similar

we look back 40 years, we see that, by coincidenc

obal demand for oils and meals grew in step with
ne another.
he feedback from income growth to oil demand (for
od) and meal demand (for meat) meant that the
obal consumption of oils and meals rose in paralle
nce 2000, world vegetable oil demand has grown
ster than meal demand, with the divergence
etween the two curves widening steadily.
he best reason for the change has to be biofuels.
hey generate a demand for oils, but without any

erages five times that of rapeseed, six times

at of sunflower and seven times soybeans.

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

ntent of leading oilseeds. Hence, oil palm is

e oil crop best placed for the new biofuel era.

0%

0%

0%

0%

0%

0%

0%

0%

0%

0%

pid output growth. It has overtaken soybean

to become the worlds most important oil.

50

40

30

Average Annual Growth 1975-2011:

Palm Oil = 8.3%
Palm Kernel Oil = 7.7%
Rapeseed Oil = 6.2%
Soybean Oil = 4.8%
Sunflower Oil = 2.8%

20

10

0
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Palm Oil
Palm Kernel Oil
Rapeseed Oil

growth plays to oil palms strengths

Now that we are in a world that craves more and

more vegetable oil, and is doing so at a faster rate
han its demand for meal, it wants more of the worl
oilseed output to come from a crop that gives us a
of oil and relatively little meal.
The crop that best meets this need is called oil
palm!
As a result, it is not simply because oil palm is a
highly productive and cost-competitive
cost
crop that it
has captured a greater share of world supply.
n reality, the world needs more palm oil, rather tha
other oils, if it is to avoid the problems of large

odiesel demand is very sensitive t

the biodiesel premium over diesel

ckly to swings in the biodiesel premium over

sel. This links biodiesel to diesel prices.
300

460

250

420

200

380

150

340

100

300

50

260

220

-50

180
Jan-07

-100
Jan-08

Jan-09

Jan-10

Jan-11

Premium, US$ per tonne

500

ere biofuel users can pay the government

ney not to use biofuels if they get too costly.
550

90

450

80

350

70

250

60

150

50

50

40
-50
Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

Biodiesel Premium over Diesel (US$/tonne)

00

high price differentials earlier this year.

round the world, biodiesel users cut back demand

hen biodiesel became very expensive vs. diesel.
ome of the cutbacks were temporary, as blenders
aited until biodiesel became cheaper. Some were
aused by users buying out their mandates

a few cases, governments responded to high food

ices by reducing their legal mandate targets.
Thailand, your government reacted to low palm oi
utput by cutting the mandate for a while.
he effect of all these changes was to pull biodiesel
ices (and hence vegetable oil prices) closer to the

Understanding vegetable oil prices

price levels today now include biofuels

hope that I have persuaded you that you have to

ake account of biofuels today. In English, we talk
about a tail wagging the dog. In oils today, the ta
of biofuels, with only one eighth of world oil demand
s waging the dog of the global vegetable oil
market (with the other seven eighths of demand).

Because of the price band, petroleum prices are

undoubtedly a major factor behind oils pricing today

Vegetable oil stocks also influence prices. The

ecent period of low palm oil output has passed, an
will next study how the upturn is affecting stocks.

Finally, vegetable oils compete. I will illustrate this

cks and oil supply-demand

supply
balanc

fting growth in output of the main vegetable

to 6 million tonnes worldwide in 2011/12.

2
2006/07-2007/08 2007/08-2008/09 2008/09-2009/10 2009/10-2010/11 2010/11-2011/12

wth and cause it to lag behind output growth,

r two years when demand exceeded output.

0
2006/072007/08

2007/082008/09

2008/092009/10

2009/102010/11

2010/112011/12

eed stocks. Biofuel price sensitivity will be

ial to balancing world oil supply vs. demand.
12
10
8
6
4
2
0
2006/072007/08

2007/082008/09

2008/092009/10

2009/102010/11

2010/112011/12

Oilseed stocks are big enough to ensure high growt

n world oil output, while high prices slow demand.
Within the world oil total, palm oil will make a bigger
ontribution to global production growth in 2011/12
han it did in 2010/11, rising 3.0-3.5
3.0
million tonnes.
This increase will be crucial in keeping world supply
xpanding in line with the rise in global oils demand
The key looking further ahead will be the speed of
he revival in palm oil output growth. Newly mature
reas and good rains in the past year should keep
world year-on-year
year CPO production growth strong f

alaysian CPO output growth in 2010 was a

mporary aberration and that growth is back.

0%

5%

0%

5%

0%

5%

0%

5%

0%

5%

0%

5%

0%

ai CPO output fluctuates than Malaysias,

d we can also see the poor upturn in 2010.

00%

50%

00%

50%
0%

50%

00%
1997

1999

2001

2003

2005

2007

2009

2011

cle has been spread throughout the world of

palm all the way from SE Asia to S America.

30%

20%

10%
0%

10%

20%

30%

40%
Q1.2009

Q3.2009

Q1.2010

Q3.2010

Q1.2011

nel output in 2010 and early 2011, which

plains the recent wild swings in PKO prices.

30%

25%

20%

15%

10%
5%
0%

-5%

10%

15%

20%
Q1.2009

Q3.2009

Q1.2010

Q3.2010

Q1.2011

oil and palm kernel growth cycles.

010 was undoubtedly an unusual year, in that the

ear-on-year
year increases in both CPO and PK output
were very modest by historical standards (which ma
ave been a result of low fertiliser use in 2008-09
2008
in
eaction to high costs), and it ended with sharp year
n-year
year declines in Q4 production of CPO and PK.
Palm kernel output was hit harder than CPO in the
ownturn, but was displaying very strong growth
gain by the second quarter of 2011.
ooking at the growth patterns, we must be close to
he peaks. Malaysias and Indonesias year-on-year
year
rowth rates peaked in May-June,
May
while the Thai ra

What is the role of palm oil stocks

es used to be fairly easily explained in terms

hanges in Malaysian stock levels.

200

750

800

500

600

400

250

200
0

200

400

-250

600

800
Jan-01

-500
Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Year-on-Year Stock Change, '000 tonnes

000

ove together. Prices are still growing year-onyear

despite the big increase in Malaysian stocks.
1,000

1,600

800

1,200

600

800

400

400

200
0

0
-400

-200

-800

-400

-1,200

-600

-1,600

-800

-2,000
Jan-01

-1,000
Jan-03

Jan-05

Jan-07

Jan-09

Jan-11

Year-on-Year Stock Change, '000 mt

2,000

e must look instead inside the price band

is clear that palm oil stocks (we use Malaysian

tocks as the reference) no longer drive CPO prices
nstead, our theories must adjust to reflect the band
ogic suggests that, with a price band, a floor exists
o CPO prices when high stocks have driven prices
own so far that it becomes profitable to make and
se biodiesel without any government subsidy.
However, when stocks are low, food demand for oil
hould pull CPO far enough above the price floor fo
ood use to compete oil away from biodiesel output.
So, we expect the CPO premium over diesel to be
nversely related to the stock level, i.e., the premium

r diesel.. Early in 2011, the premium was too

h, but it is now back down near its average .
500

.2

400

.0

300

.8

200

.6

100

.4

.2

-100

.0
Jan-07

-200
Jan-08

Jan-09

Jan-10

Jan-11

EU premium over diesel, $/tonne

.4

remium over diesel should rise a little, but

ot back to the peaks of early this year.
year
500

400

300

200

100

-100

0
Jan-07

-200
Jan-08

Jan-09

Jan-10

Jan-11

EU Premium over diesel, $/tonne

d soy oil in vital markets such as India keeps

y oil prices from moving too far above CPO.

05%

00%

90%

90%

80%

85%

80%

70%

75%

70%

60%

65%

60%

50%

55%

50%
Q4 2003 Q4 2004 Q4 2005 Q4 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010

40%

Palm Oil % of (Palm + Soy Oil) Imports

95%

rmal, the soy oil premium, which is already

h, is not expected to rise much further.

600

500

400

300

200

100
0

100

200
Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

have to analyse the petroleum market as

well as supply-demand
demand in vegetable oils.

The picture I have described is quite different from

hat you may have expected.
We are now in a new world in which vegetable oils
rade in price band, created by biofuels, which links
egetable oils inextricably to the petroleum price.
The old fashioned drivers of oils prices, i.e., supplysupply
emand and stocks, are still a factor in setting price
ut the supply-demand
demand balance only influences
rices within limits that are set by petroleum.
Therefore, I will end with a few remarks about the

hat is the petroleum market doing?

couraging lots of drilling. This should boost

put, especially when Libyan supplies return.
125

2,000

100

1,500

75

1,000

50

500

25

0
2005

Q3.2006 Q2.2007 Q1.2008 Q4.2008 Q3.2009 Q2.2010 Q1.2011

Number of Oil Rigs
Brent Crude

Brent Crude North Sea Oil, $/barrel

2,500

by far the biggest consumer, has stabilised,

high prices have pushed it below its peak.
22

20

21

00

20

80

19

60

18

40

17

20

16

15
199 2

199 4

199 6

199 8

200 0

200 2

200 4

200 6

200 8

201 0

Demand, million barrels/day

40

demand; yet, prices were much lower in the

st, when stocks were also much lower.
100

125

95

100

90

75

85

50

80

25

75

70

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

US Stocks in Days of Demand

150

should remain at current high levels

The cure for high prices is high prices.

This is as true for petroleum as it is for other market
High crude oil prices are stimulating new discoverie
nd output, including from deep offshore fields and
rom unconventional sources such as tar sands.
High crude oil prices are also hitting demand, both a
sers save energy and turn to cheaper alternatives,
ed by natural gas, but also by making a double dip
ecession much more likely.
This is why I believe the petroleum prices must fall,
nd this will have a direct and negative impact on a

www.LMC.co.uk

Acknowledgements: EIA, IMF, Jacobsen, MPOB,

National Biodiesel Board, Oil World, OPEC, Public Ledger,
SEA, TNS, UFOP, US Commerce Dept., USDA, World Bank

Thank You

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LMC International, 2011

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