Palm-oil prices surging as trade politics bites
Fluctuation is shaped by shifts in commodity markets and Indonesia’s new biofuel plan
If you see a flowering of “palm-oil-free” labels on supermarket shelves in 2020, then thank Indonesian drivers, President Donald Trump’s trade negotiators and sickly pigs in China.
Palm oil — the red, semi-solid fat used in everything from noodles and soap to pastry and lipstick — has rarely been less attractive to consumer-product manufacturers. That isn’t so much a result of environmental campaigning against a product blamed for deforestation in Indonesia and Malaysia; it’s more a reflection of shifts in commodity markets driven by high-level trade politics.
The price of palm oil has been surging, sending its discount to soya-bean-oil futures from more than $150 a ton six weeks ago to less than $26 a ton on Friday. Given the way hedge funds have cut bullish bets on soya-bean oil in recent weeks, the spread could flip to a premium soon for the first time in almost a decade.
That’s important because soya-bean and palm oil — and, in Europe, rapeseed — are close substitutes for each other, and changes in one market tend to ripple through all three commodities. Just to make things even more complicated, a key factor for soya-bean oil is the price of the meal left over after crushing. Those meal prices, in turn, are influenced by the livestock market, given that most of the residue is used as animal feed.
The recent price shifts have had diverse causes. In Indonesia, the world’s biggest palm-oil producer, President Joko Widodo announced plans in August to increase the share of biodiesel in domestic fuel to 30% from 20% by the start of 2020. That’s sent producers, refiners and traders scrambling to secure supplies in a market that was already around its tightest levels in three years. As a result, prices of the Malaysian benchmark contract are up 29% since the start of October.
Soya beans have the opposite problem. Thanks to China’s suspension of oilseed imports from the US and slack demand for animal feed as a result of African swine fever, even the devastation that the Midwest crop suffered in flooding earlier in 2019 hasn’t been sufficient to squeeze the market to the point where prices start to pick up. The much higher volumes of palm oil produced for each hectare of farmland normally ensure it is priced at a significant discount to soya bean and rapeseed, but in the case of soya, that’s now all but disappeared.
Should current conditions persist, consumer-product manufacturers may find that switching to alternative fats and slapping a picture of an orangutan on the label is a cost-free way of giving themselves a green tinge. Just don’t kid yourself you’re saving the world by buying that “rainforest-friendly” chocolate, though. Widodo’s biofuel mandate was driven as much as anything by a desire to make up the demand lost as the EU moves towards eliminating palm oil from its own biodiesel by 2030.
The effect will be to switch palm biodiesel consumption from Europe — where road transport is growing slowly, and likely to electrify rapidly — to Indonesia, where it’s growing fast and likely to electrify slowly. That could push demand upward or downward. If high palm prices are sustained, you should expect to see smallholders slashing and burning more rainforests and tropical peatlands to create new plantations.
Soya beans aren’t the best friends of the rainforest, either. While most of the glut is a result of China’s boycott of American crops, the vegetable oil market is almost as international as the one for crude oil, and Brazil wants to become the Saudi Arabia of soya. If more soya-bean oil goes into products that previously used palm, that ultimately will lead to more soya plantings in Brazil’s cerrado savannah, an activity that was indirectly linked to 2019’s Amazon fires.
The better solution probably isn’t more trade fights and shifts in global crop patterns, but better use of plantation land. Palm oil’s great advantage is that its agricultural yields are higher than with alternative oilseeds. Its disadvantage is that so much of the industry is poorly regulated, encouraging deforestation to produce yet more product. Well-managed palm plantations, combined with replantings to improve the productivity of existing sites, may be a far better way to supply the world’s demand for oils than increasing the acreage of either soya beans or rapeseed; badly managed ones do more damage than petroleum.*
Europe has been using its import muscle to cajole Brazil’s slash-happy government into a more active programme of forest protection. The effectiveness of that push is yet to be seen, but it’s almost certainly a better policy than interdicting trade altogether. If you want to persuade producing nations to clean up the palm-oil trade, be prepared to buy the good stuff.
* The full life-cycle assessment of different vegetable oils is a bitterly debated topic that’s mixed up with trade politics. We’re relying on the estimates in “Considerations on GHG Emissions and Energy Balances of Promising Aviation Biofuel Pathways” (Renewable and Sustainable Energy Reviews, Volume 101, March 2019, Pages 504-515), which suggests that the nature of the land use change determines whether palm is more or less damaging than alternative crops.
• Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. bloomberg.com/opinion