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
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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
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 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
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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

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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

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(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