Prospects for world

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Prospects for world supply demand
of vegetable oils - global challenges and
implications for theoil palm agro-industry
Peter Thoenes
Trade and Markets Division Food
and Agriculture Organization of the U.N.
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Oilcrops market outlook and
oil palm challenges

• Overview
• Medium-term outlook for the global oilcrop market
• Global food demand, food security, resource
  issues and climate change
• The case of oil palm
• Emerging recommendations

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Oilcrops market outlook and
oil palm challenges

• Medium-term outlook for the global oilcrop market
• Price projections
• Supply projections
• Demand projections (incl. biofuel)
• Trade Projections
• 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

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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
• - below 2007/08 peaks
• - exceeding 1997-2006 average
  
  oilseeds 45
• vegoils 70
• meals 30
• - annual growth rates 1-2
• - likelihood of continued price volatility

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Oilcrops market outlook and
oil palm challenges

• palm oil remains the lowest-priced oil
• in real terms
• - stable (as opposed to historical
• downward trend!)
• - above 1997-2006 average
• vegoils 30 (outstanding!)

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Oilcrops market outlook and
oil palm challenges

• crude oil price assumption
• moderate rise to USD 70 in 2018
• (60 above 1997-2006 average)
• 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)

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Oilcrops market outlook and
oil palm challenges

• EU vegoil production continues to expand 26
  (from domestic and imported seed)
• palm oil
• 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

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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
• rising share of diesel in transp. fuel
• shares of BD in total transport fuel
• to remain modest
• few important players

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Oilcrops market outlook and
oil palm challenges

• vegoils as feedstock
• 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

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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
• BD price
• to grow steadily
• remaining well above fossil diesel prices

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Oilcrops market outlook and
oil palm challenges

• BD trade
• 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

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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

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Oilcrops market outlook and
oil palm challenges

• Import market
• developing countries to lead global imports (esp.
  China, India, other Asia)
• 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
• gt50 of domestic vegoil consumption to stem from
  imports
• strong import dependence in several countries
• global market instability

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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

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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

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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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Oilcrops market outlook and
oil palm challenges

• b) Global food demand, resource issues, climate
  change
• 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!

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Oilcrops market outlook and
oil palm challenges

• Land availability
• significant amount of land potentially suitable
  for soybeans and oil palm

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Oilcrops market outlook and
oil palm challenges

• actual land availability is limited
• 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/environmenta
  l 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
• more conversion of cultivated land
• (rubber, degraded land, secondary forests)
• yield levels
• only minor improvements
• but considerable yield gaps

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Oilcrops market outlook and
oil palm challenges

• b) Area expansion issues
• limited actual potential - except on forest land
• 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
• (comparison soybean Brazil forest 300 years,
  grassland 37 years)

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Oilcrops market outlook and
oil palm challenges

• 2.) reduction in biodiversity
• 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

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Oilcrops market outlook and
oil palm challenges

• 2.) improved planting material
• 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

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Oilcrops market outlook and
oil palm challenges

• e) Palm oil as BD feedstock
• 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

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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 RD and infrastructural works
• enforce (and monitor adherence to) regulations

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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)

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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

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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. RD
  (productivity enhancement) and facilitate
  technology transfer

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