Palm oil pundit speaks
Dorab E. Mistry, director of Godrej International Ltd. in Mumbai, India, spoke about palm oil on March 15, 2010, during the 2010 Annual Convention of the National Institute of Oilseed Products in Palm Springs, California, USA.
Mistry noted that the introduction on May 24, 2010, of dollar-denominated palm oil futures by the Chicago Mercantile Exchange Group (CME), in cooperation with Bursa Malaysia Derivatives Bhd, “is likely to put palm oil trading within reach of thousands of investors and commodity market participants. It will demystify palm oil to players in North America and will make the market more liquid.”
Mistry pointed out that 3.5 million metric tons (MMT) of palm oil and palm kernel oil (PKO) were produced in 1976, which constituted 7.25% of total production of the 17 major fats and oils tracked by Oil World ISTA Mielke GmbH in Hamburg. By 2008, palm and PKO production constituted 30.5% of total world production of fats and oils.
“Over the same period, production of soybean oil expanded from 9.6 MMT in 1976 (20%) to 36.8 MMT in 2008 (23%),” Mistry said. “This growth in consumption has been possible due to the prodigious productivity and low cost-basis of palm oil.” Why is palm oil so popular? Mistry suggested a number of reasons, beginning with location. “Palm oil has the advantage of being grown within 8° north and south of the equator. The principal producer countries are Malaysia and Indonesia and surrounding islands. This area also happens to be on the doorstep of major population concentrations in China, India, Pakistan, Bangladesh, and the whole of Southeast Asia. Sailing time to most . . . markets is just about a week, and smaller ships of 6,000–8,000 metric tons have been used in most cases,” Mistry noted.
Growth in production has been matched by the creation of an efficient refining and processing industry that has either been integrated with larger plantation owners or by export customers, he added.
“Palm oil is unique in the large proportion of refined and processed, value added products that are exported,” Mistry suggested, “quite in contrast to soy oil or sunflower oil or rapeseed oil, which are largely exported in crude form. Even today, most price comparisons are made between the price of RBD (refined, bleached, and deodorized) palm olein and crude degummed soybean oil. This at once puts palm at an advantage because the importer gets a refined, readily salable product. This emphasis on export of refined products has made palm extremely popular with smaller importers and traders who can very quickly and conveniently turn their purchase into cash.”
Other factors leading to the success of palm oil include the lack of a large home market, the lack of a by-product (such as meal), and its low cost-basis.
“For example, one hectare of plantation land in Malaysia produces 4.5 metric tons (MT) of palm oil plus another 0.5 MT of PKO. In the United States, one hectare produces almost 2.7 MT of beans or 0.3 MT of soy oil,” Mistry said.
He also did some crystal ball-gazing to determine whether palm oil production will continue to expand at the same rate as in the past 10 years. With recent inflation and higher commodity prices, two questions arise.
Mistry believes that the rate of expansion of palm oil production will decelerate in the short term, largely because expansion of acreage in Malaysia “is now almost over.” In Indonesia, “the scope for [an] increase in productivity is large because almost 30–40% of planters are smallholders. However, it is a big task to get smallholders to embrace new technology and improve productivity,” he noted.
“My prognosis is that we shall have to look to higher prices in the future to attract acreage to oilseeds and to palm and that consumers will have to get used to paying higher prices,” he concluded.
In the meantime, Mistry thinks that per capita consumption increases will continue at the current pace for the foreseeable future. “The first reason is population growth,” he said. “Secondly, the big population countries like China, India, Bangladesh, Pakistan, and Indonesia have low per capita consumption rates as compared to developed countries. On the other hand, their economies are growing fast and [the] living standards of their populations, almost 3 billion people in all, are rising fast. That factor is likely to keep consumption growing at the current pace.”
In the past, countries such as China and India artificially held down consumption by imposing high import taxes on vegetable oil imports. The entry of China and India into the World Trade Organization has led to the abolishment of high import taxes and import quotas. “This has lowered the price and led to fast growth in consumption,” Mistry said. “The most recent example is India, which abolished all import taxes on unrefined vegetable oil in late 2007. This led to a massive growth in per capita consumption of almost 13%, or some 2 MMT.”