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SINGAPORE (Bloomberg) – One of the world’s most popular commodities is as expensive as it has been in eight years, a rebound that points to rising food prices and a pullback in biofuel initiatives in the coming months. .
The price of palm oil, an ingredient in about half of all supermarket products, is up nearly 70% from the year’s low in May.
Bad weather has disrupted the planting of rival oils and the supply of palm is also scarcer, as a result of a shortage of migrant workers on Malaysian plantations.
At the same time, optimism about a coronavirus vaccine has improved economic forecasts and boosted demand.
Palm’s rally has outpaced soybean oil, which is up about 52% from its March low.
Overall, rising prices suggest that food is on the verge of becoming more expensive, at a time when consumers around the world are already under economic pressure.
“The highest prices will hit supermarket shelves in a month,” said Sathia Varqa, owner of Palm Oil Analytics in Singapore. “Edible oils are the most exposed.”
As the price of palm oil has skyrocketed, it almost catches up with soybean oil, its closest substitute. Outside of brief moments earlier this year, the gap hasn’t been that narrow since 2011.
That same year, one of the strongest La Niña episodes in decades devastated crops and squeezed supplies of edible oil around the world. Food prices skyrocketed, contributing to popular unrest in the Middle East that ultimately resulted in the Arab Spring.
From now on, the effects of the palm rally may be offset by government stimulus programs and other types of Covid assistance for consumers.
India, the world’s top palm buyer, slashed import tariffs on raw palm starting Friday to protect consumers from rising prices.
And high prices will eventually trigger a contraction in demand, said veteran analyst Dorab Mistry, director of Godrej International. “This always happens over a period of a few months,” he said.
Few options
With the rebound in other oils, there are few options for price-sensitive buyers in India and China.
“Palm oil remains the cheapest vegetable oil out there and continues to attract fresh demand,” said Anilkumar Bagani, head of research at Sunvin Group, a Mumbai-based broker and consultant, noting higher prices for soybean oils. , sunflower and rapeseed.
“There may be some demand for food going into soybean oil, but that represents only 10-15% of total palm demand,” he said. “This loss will be compensated by the news of the vaccine, which indicates the recovery of food, and demand for palm, in the long term.”
The effects of rising prices on the biofuel market are even more murky.
Palm oil is now trading at a premium of US $ 413 to diesel, the highest premium since 2011.
In the nine years since then, countries such as Indonesia, Malaysia, Thailand and Colombia have enacted mandates to require the use of domestic palm oil in national biodiesel initiatives, while the EU’s renewable energy policies have boosted imports of palm of the block, with almost half that amount. channeled into energy use.
Proponents of biofuels worry that the spike in palm oil prices will push some countries to roll back their mandates.
Indonesia has already said it will delay its ambitious plan to increase its biodiesel mix to 40% from the current 30%, as the wider price gap “presents challenges for the government in funding incentives for the program.”
The future of Palm?
For now, market participants are mixed about the future of palm oil. Rabobank expects futures to fall as stocks rebound, Sunvin’s Bagani says a downward correction is justifiable but there will not be a major drop, while Varqa expects the reduction in supply to push prices above RM3,300 in mid-December.
For growers, the price surge has been a boon, fueling the latest quarterly earnings for palm giants like FGV Holdings Bhd.
., IOI Corp. Bhd. and Kuala Lumpur Kepong Bhd.
Fitch Ratings also increased forecasts for the world’s leading producers Sime Darby Plantation Bhd. and Golden Agri-Resources Ltd.
Supply may remain tight for a while, even if this year’s wetter weather would normally be good for next year’s yields.
Plantations in Malaysia, the second largest producer, faced a worker shortage even before the pandemic; In recent months, farms have recruited prisoners to harvest the fruit. Aged trees are also less productive, said Oscar Tjakra, a senior analyst at Rabobank in Singapore.
Plantations have also opted for share buybacks rather than expansion, Godrej’s Mistry said, which could cause them to fall behind production capacity as the global economy recovers, and points to long-term consequences. deadline for the offer.
“We have seen a slowdown in the new hectare that is being planted thanks to pressure from NGOs, governments and the previous lower prices,” Mistry said. “All of this has combined with the weather gods (La Niña) to create a perfect storm for vegetable oil prices.”
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