Palm oil production has quadrupled; further ramp-up is likely
What happens in China and South America is crucially important to the future of U.S. soybean farmers, but it’s not just Brazil or even soybeans alone that farmers need to have on their radar. A major developing story across the Pacific in Indonesia is the rapid-fire growth in palm oil production.
Palm oil competes head on with soybeans in key markets, from the food industry to biodiesel. While soybean production has been ramping up globally, palm oil has been increasing even more.
During the past 15 years, palm kernel production has increased by 7.4% per year, more than double the 3.5% growth rate for soybeans. Canola, particularly in Canada, has also been growing, with a 4.3% annual growth rate. Canola is the No. 2 oilseed worldwide comprising 14% of oil production—still behind soybean’s 58% dominance.
World consumption of all fats and oils is a huge success story, as it’s more than doubled in the past 20 years. But palm oil’s and palm kernel oil’s annual growth rates more than double those of other oils and fats. These oils account for 33% of total fats and oil consumption and 63% of exports, says Thomas Mielke, director of Oil World Global Market Research.
Price Cap. Does this really matter to a U.S. soybean farmer, who ships one out of every four bushels to China? Chad Hart, an Iowa State University ag economist, thinks so. "Palm oil is keeping a lid on how high soybeans and soybean oil prices can go," he says. "It’s like what Argentina and Brazil are doing in the soybean market."
When you’re talking about palm oil, two countries are responsible for 85% of global production—Malaysia and Indonesia. Producing 59 million tons, Indonesia is home to more than half of the world’s palm oil. Malaysia produces 20 million tons.
For perspective, the production of palm oil has increased more than 400% in the past 20 years, admittedly from a low base. That’s twice the pace of soybean oil production. In 1980, palm oil production was 4.6 million tons, according to Oil World. By 2012, output reached 53.7 million tons, and by 2020, at least 78 million tons of palm oil will be required by consumers worldwide.
Indonesia, which had virtually no land in palm oil production in 1970, has 19.8 million acres today. Sharp increases took place in the 1980s and 1990s, spurred by government policy.
More recently, palm oil producers expanded for Europe’s increased biodiesel needs. "They planted more trees and a concern developed about deforestation," Hart says. In 2011, this resulted in a "forest moratorium" by the Indonesian government.
Despite the moratorium, the number of acres continues to escalate. From 2011 to 2013, total acreage has grown by an average of 1.6 million acres per year, even faster than the 1.2 million acres of growth per year during the previous 10 years.
For 2013/14, USDA forecasts Indonesian palm oil production at a record 31 million metric tons, up 9% in just one year.
Production Creep. "The escalation of the annual growth rates during the past two years provides an interesting counterpoint to industry assertions that the moratorium inhibits their ability to grow," according to USDA’s Commodity Intelligence Report. "It’s estimated the Indonesian palm oil industry possesses 15 million to 17 million acres of undeveloped land and theoretically has the ability to maintain current rates of expansion for at least the next decade."
Mielke predicts global palm oil and palm kernel oil production will jump 33% in the next 20 years. Global growth of vegetable oil production can hardly track demand. "Soybean oil, palm oil and other vegetable oil prices fluctuate at higher levels than 10, 20 and 30 years ago," he says.
Production and consumption of soybean oil will continue to rise, but its expansion is insufficient to satisfy demand, which requires more rapid growth of palm oil, Mielke says. "Palm oil has become the most important vegetable oil," he adds. In 2004, it passed soybean oil production. Today, palm oil production is just under 60 million tons, besting soybean oil by 15 million tons.
Since 1997, palm oil exports have nearly quadrupled. All other oils and fats make up 48% of exports.
However, it’s important to keep palm oil’s growth in perspective. Palm oil’s value is only part of that of soybeans’, and that doesn’t count its contribution to soybean meal.
"Soybeans still dominate the global oilseed market," Mielke says, and further growth is needed to meet demand. "Agricultural land has become a limiting factor, but there’s big potential in Russia and Brazil." He says yield increases are needed along with GMO seed.
While the U.S. exports nearly half of its soybean production, the U.S. is a net importer of oils and fats. "The U.S. is likely to further boost net imports of fats and oilseed to a record 2 million tons in 2013/14," Mielke says, noting that he expects a jump in total oilseed exports of approximately 8 million to 9 million tons in 2013/14.
Meanwhile, China imports an enormous quantity of soybeans, but it also exports soybean meal. China has emerged as the largest soybean importer in the world and the world’s largest crusher.
Mielke’s price outlook for vegetable oils is generally bearish. "I expect weakness in soybeans and meal in the medium term," he shares. But Mielke looks for more strength to come from oil.
Biodiesel has interesting dynamics. Argentina is exporting biodiesel to Africa and Iran, and they delivered 150,000 tons to the U.S. in October. If passed, a government mandate of the nation’s fuel to comprise 7% biodiesel would help absorb Brazilian supplies. Emerging biodiesel demand is quite a change, Mielke says.