Prospects for world supply & demand of vegetable

oils - global challenges and implications for the

oil palm agro-industry

Peter Thoenes
Trade and Markets Division
Food and Agriculture Organization of the U.N.
Oilcrops market outlook and oil palm challenges

Overview

1. Medium-term outlook for the global oilcrop market

2. Global food demand, food security, resource issues and
climate change
3. The case of oil palm
4. Emerging recommendations

2
Oilcrops market outlook and oil palm challenges

1. Medium-term outlook for the global oilcrop market

a) Price projections
b) Supply projections
c) Demand projections (incl. biofuel)
d) Trade Projections
e) Sources of uncertainty

model-based projections generated by OECD-FAO

entire agricultural sector, including biofuel
only four main oilcrops & products covered
10-year horizon 2009-2018

focus on vegoils ... palm oil

3
Oilcrops market outlook and oil palm challenges

a) Price projections for oilseeds, oils, meals

overall:
- above historical averages
continuing demand expansion, food and non-food
below average s-t-u ratios for oilseeds and products

in nominal terms:
World prices - in nominal terms

- below 2007/08 peaks 2.5

- exceeding 1997-2006 average

oilseeds +45% 2.0

index 1997 = 1
vegoils +70%
Oilseed meals
meals +30% 1.5
Oilseeds
- annual growth rates: 1-2%
1.0
- likelihood of continued price volatility
Vegetable Oils

0.5
1997 2000 2003 2006 2009 2012 2015 2018
Source: FAO/OECD
4
 World prices for individual vegetable oils
(nominal)
palm oil remains the lowest-priced oil
Oilcrops market outlook and oil palm challenges

2200
Soybean Oil
1800
Rapeseed Oil

USD per tonne

1400 Sunflower Oil

Palm Kernel
1000 Oil
Groundnut oil
600
Palm oil

200
1998/99 2007/08 2017/18
Source: FAPRI

in real terms: World prices - in real terms

- stable (as opposed to historical
2.0
downward trend!)
- above 1997-2006 average: index 1997 = 1
1.5
vegoils +30% (outstanding!)
Oilseed meals

Oilseeds
1.0

Vegetable Oils
0.5
1997 2000 2003 2006 2009 2012 2015 2018
5
Source: FAO/OECD
 crude oil price assumption:
Brent crude oil price
Oilcrops market outlook and oil palm challenges

120
moderate rise to USD 70 in 2018 100
(60% above 1997-2006 average)

USD per barrel

80
60
40
20
0
2000 2003 2006 2009 2012 2015 2018
Source: USEIA, OECD

b) Supply projections (oilseeds, vegoils)

further increase in global output (2018 over 2006-08 avg.):
oilseeds +32%, vegoils +44%
exceeding other crop sectors
concentrated in developing countries
but general reduction in annual growth rates (compared to past 10 years)
limited yield improvements
slower area expansion, esp. in developing (e.g. Lat.America)
6
 EU vegoil production continues to expand: +26% (from domestic and imported seed)
palm oil:
Oilcrops market outlook and oil palm challenges

fastest expanding vegoil (ahead of soy oil)

driven by food and industrial demand
main factor in Indonesia: area; in Malaysia: yield
share in total vegoil output: grows to 30%

c) Demand projections for vegoils

further expansion: +44%

commodity group with fastest growing consumption: 3% p.a.
but growth slowdown
reduced population growth + saturation effects
firm prices
developing countries contribute most (esp. in Asia)
population growth, income growth, low per caput consumption level
largest expansion: palm oil, followed by soyoil
EU and China account for 28% and 16% of global expansion

7
Oilcrops market outlook and oil palm challenges
Biodiesel demand
BD production:
demand strongly driven by national utilization mandates plus subsidies
commercial viability not secured
global BD production to more than double: +127% (2009-2018)
expansion in transport fuel Biodiesel-share in total diesel consumption
(in energy equivalent)

rising share of diesel in transp. fuel 10%

8%

6%
2009

shares of BD in total transport fuel 4%

2018
2%
to remain modest
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BD production - current and projected

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Growth in biodiesel production
16 (2006-08 over 2018)
billion liters

800
12 2006-2008
600
2018
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Source: FAO/OECD
 vegoils as feedstock
Oilcrops market outlook and oil palm challenges

global vegoil use for BD to almost double:

from 16 (2009) to 31 mmt (2018)

weight of BD demand in total vegoil consumption:

to range (in 2018) between 18 and 95 %
main producers avg. rises from 11% in 2006-08 to 20 % in 2018

Use of vegetable oil for biodiesel

- in percent of total veg. oil use -
100%

80%
Average
60% 2006-2008
40% 2018

20%

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Oilcrops market outlook and oil palm challenges

Malaysia & Indonesia (palm oil)

slow development of emerging BD industry
BD industry to absorb less than 4% of palm oil output
low national consumption targets
increasing palm oil price (relative to BD and crude oil prices)
poor export prospects (increased competition, sustainability requirements)
weight of palm oil among BD feedstock to remain about unchanged
ca. 11% of total vegoil BD-use
ca. 9% of all BD produced
Biodiesel Price
( Germany, net of BD tariff)
BD price:
150
to grow steadily

USD per hectolitre

130
remaining well above fossil diesel prices
110

90

70
2005 2009 2013 2017
Source: FAO/OECD

10
 BD trade
Oilcrops market outlook and oil palm challenges

expected to double (6.7 mill litres in 2018)

5 main players: EU, Argentina, Malaysia, Indonesia, USA
share of BD trade in total BD production to fall slightly
(import demand increase less rapidly than production)
domestic policies, trade barriers, lack of harmonized biofuel specifications

Biodiesel net trade - current and projected

5.0

3.0
billion liters

1.0 EU27 2006-2008

2018
Malaysia
Argentina

Indonesia

-1.0

USA
-3.0

-5.0 Source: FAO/OECD

11
Oilcrops market outlook and oil palm challenges
d) Trade projections (major vegoils)

50% expansion
production in main comsumption regions not keeping up with demand
fastest growing commodity
BF production triggers additional import demand
lead of developing countries
continued expansion in South-South trade
palm oil: remains most traded vegoil

Export market:
3 countries to supply 75%: Indonesia, Malaysia, Argentina
Indonesia & Malaysia (palm oil)
4-5% annual growth
80-90% of domestic production exported
Argentina & Brazil (soy oil)
moderate growth
other sources of growth: Canada, USA, CIS nations 12
 Import market:
developing countries to lead global imports (esp. China, India, other Asia)
Oilcrops market outlook and oil palm challenges

but EU also contributes to expansion

EU imports to more than double (BD production)
esp. palm oil imports for food industry
to become biggest importer ahead of China
>50% of domestic vegoil consumption to stem from imports
strong import dependence in several countries
global market instability

13
Oilcrops market outlook and oil palm challenges

e) Sources of uncertainty

resumption of global economic growth: 2010 or later?

policy responses to global price volatility
high market concentration increases market instability
continued consumer concerns about environmental risks as well as GM
products
exposure to developments in the energy market:
higher crude oil prices
lower crop production (via rising production costs)
reduce food consumption (via higher crop prices)
increase BD production
land reallocations triggered by food/fuel competition

14
Oilcrops market outlook and oil palm challenges

2. Global food demand, food security, resource issues and

climate change

a) Food security
b) Global food demand, resource issues, climate change

15
Oilcrops market outlook and oil palm challenges
a) Food security

good medium- and longer-term market prospects

stable/slightly rising commodity prices
demand growth matched by production increase
developing nations participating in expansion of production, consumption and
trade
deterioration in world hunger and food security
rise in number of people living below the hunger threshold
rising food prices

contributing factors:
temporary supply and demand imbalances
increased market instability
national interventions in markets
direct linkage energy & food prices
food/fuel competition
falling international investment flows
budgetary pressure on development aid
global economic slowdown
16
 b) Global food demand, resource issues, climate change
Oilcrops market outlook and oil palm challenges

Long-term food requirements:

further rise in avg. per caput consumption (in kcal/person/day)

oilcrop products remain major contributors to future growth in developing country

food consumption

Sources of production growth:

80% from higher land productivity: yield & cropping intensity
20% from area expansion
Productivity
developing country yield levels continue growing, but growth rates may fall!
17
 Land availability:

Oilcrops market outlook and oil palm challenges

significant amount of land potentially suitable for soybeans and oil palm

18
 actual land availability is limited
Oilcrops market outlook and oil palm challenges

competition among food crops, pasture uses, wood uses and other, new uses
(energy crops, crops with low carbon footprint)
growing urban, industrial, infrastructural uses
only part of the land has high or at least good yield potential
considerable part of land consists of forest - conversion carries significant
social/environmental costs

Climate change:

no consensus on ultimate net global impact on agric. production

global warming and changing rainfall patterns potentially
beneficial in high latitude regions
damaging in low latitude tropical areas
uncertainty regarding the effects of higher atmospheric CO2 concentration (carbon
fertilization)
consensus:
food security to be affected
considerable scope to improve resilience via adaptation
until 2050: increased risk of water stress; rising incidence of extreme weather
events
after 2050: significant impact on agr productivity (shifts in production frontiers)
and on the global food system
19
Oilcrops market outlook and oil palm challenges

3. The case of oil palm

a) Growth factors: productivity and area

b) Area expansion issues
c) Productivity improvement
d) Socio-economic dimension
e) Palm oil as BD feedstock

20
Oilcrops market outlook and oil palm challenges

a) Growth factors: productivity and area

past growth:
strongly based on area expansion
of which 50-60% forest conversion
recent trend:
less primary forest conversion Average soybean yield, USA

more conversion of cultivated land (tons per ha)

(rubber, degraded land, secondary forests) 2.7

metric tons
linear trend

yield levels: 2.3

only minor improvements

1.9

1.5

but considerable yield gaps 1975 1983 1991 1999

Source : FAO
2007

Average FFB yield per ha (Malaysia) Average palm oil yield per ha (Malaysia)
24

22
4.5
metric tonnes

linear trend
20
metric tons

linear trend

18
3.5
16

14
1975 1983 1991 1999 2007 2.5
1975 1983 1991 1999 2007
21
Source : MPOB Source : MPOB
 b) Area expansion issues
limited actual potential - except on forest land
Oilcrops market outlook and oil palm challenges

environmental costs associated with deforestation/other land conversion:

1.) carbon balance
net carbon balance calculations pose problems
oil palm carbon balance turns positive after
ca. 80 years primary forest conversion

ca. 600 years peatland conversion (high carbon stock)

ca. 10 years previously deforested, degraded, idle land

22
(comparison soybean Brazil: forest 300 years, grassland 37 years)
 2.) reduction in biodiversity
Oilcrops market outlook and oil palm challenges

highest in forest conversion

some improvement when degraded land is reclaimed

3.) additional problems associated with deforestation

land fragmentation
loss of forest habitats
land clearing through fire (traditional method, cost effective, common
among smallholders)

c) Productivity improvement
1.) improved management practices
esp. in smallholder oil palm cultivation (closing the yield gap)
typically using less productive land
limited access to capital and labour
limited access to technical/managerial know-how

23
 2.) improved planting material
Oilcrops market outlook and oil palm challenges

smallholder access (closing yield gap)

traditional selection and breeding methods
19-year selection cycle
limited supplies of improved material
genetic modification
2008 breakthrough: sequencing of oil palm genome
much shorter selection cycle
risk: GM opposition by end-consumers

d) Socio-economic aspects

important benefits
employment and income generation
improved access to health care, education and other social services
attractive for smallholders (good return-to-input ratio)
dangers associated with deforestation
erosion of traditional culture, income sources, self-sufficiency
conflicts over land tenure right
workforce issues
labourers rights not respected
ethnic conflicts in case of migrant labourers
smallholder dependence on large mills (setting the FFB price)
24
 e) Palm oil as BD feedstock
Oilcrops market outlook and oil palm challenges

lowest-priced feedstock with good energy efficiency

competition from vegoils that enjoy direct policy support

all vegoil feedstock (as well as ethanol feedstock) achieve limited net carbon savings
compared to fossil fuels
esp. when counting direct/indirect land use changes
all food-crop based BF production affects food supply and food prices
rising market instability
negative repercussions on food security

investment uncertainties:
further changes in policy interventions
(food security, environmental & budgetary considerations, standards)
future crude oil-vegoil price ratio
advent of (replacement by) 2nd generation feedstock & technologies

25
Oilcrops market outlook and oil palm challenges
4. Emerging recommendations

a) National priorities

oil palm cultivation

minimize conversion of primary forests
encourage use of idle, degraded and other marginal land
promote best management practices in production & processing
sustainable yield improvement
reduced land degradation, pollution etc.
biodiversity preservation , cover crops, IPM etc.
support smallholder involvement
improve access to high-yielding varieties
promote improved plantation management
encourage establishment of smallholder cooperatives
retain diversification
promote development of small-scale mills
secure funding for R&D and infrastructural works
enforce (and monitor adherence to) regulations
environmental protection
land tenure guarantees, labour rights etc.
product quality (sustainability standards)
26
Oilcrops market outlook and oil palm challenges

Palm oil-based biodiesel production

favour production on land not suitable for food production
allow gradual expansion of BF industry; put in place entire commodity chain;
provide appropriate regulatory framework
favour production for domestic market
general support to rural development and overall economic growth
meeting fuel needs in areas where feedstock is grown, esp. less accessible areas
production for export offers limited scope
main consumers rely on domestic sources (except EU)
various barriers to trade remain (lack of harmonized specifications,
sustainability certification, tariff protection)

27
Oilcrops market outlook and oil palm challenges

a) International priorities

Food security
coordinate national policies and market interventions to reduce food security risks
encourage establishment of social safety net schemes
accelerate multilateral trade liberalization

Biofuel sector
improve policy planning and coordination
harmonization of trade regulations, sustainability standards
promote transition to 2nd generation technologies and feedstock

Climate change
coordinate national policies
foster analysis of impact on global agric. & food systems
coordinate research & investment into adaptation measures

28
Oilcrops market outlook and oil palm challenges

Oil palm
promote schemes that reward reduced deforestation and forest degradation
(e.g. REDD) and other control measures
support voluntary, private sector initiatives on standards for sustainable production
and processing (e.g. RSPO)
application is demanding and costly; economic return is uncertain
adaptation to smallholder environment needed
supporting legal/policy reforms required at national level
coordinate investment into agric. R&D (productivity enhancement) and facilitate
technology transfer

29