Palm oil is the world’s most-produced, consumed, and traded vegetable oil. Derived from the fruit of oil palm trees found in tropical climates, it’s believed humans have been using the oil for more than 5,000 years. The oil palm (Elaeis guineensis) originated from West Africa and were brought to South-East Asia just over 100 years ago as an ornamental tree crop. Today, Indonesia and Malaysia, account for around 85% of global supply though there are 42 other countries across Africa, South America, and Southeast Asia that also produce palm oil.
The British Industrial Revolution created the first substantial international trade in palm oil, which was used in candle making and as a lubricant for machinery. By the end of World War II, significant improvements in palm oil refining technology and transport methods made it possible to expand the use of palm oil in Western food products, which had been restricted until that time. As improved production methods reduced palm oil prices, it increasingly replaced its competitors starting with whale oil, then fats like tallow and lard.
The real boom came in the 1990s, when U.S. and EU regulators moved to ban unhealthy trans fat from foods, prompting manufacturers to turn to palm oil as a cheap and effective substitute. From 2000 through 2020, U.S. palm oil imports shot up almost tenfold, while EU imports more than doubled. Today, it’s in close to 50% of the packaged products we find in supermarkets, including foods like ice cream and baked goods as well as personal care and cleaning products. It’s also used in pharmaceuticals, animal feed, and biofuel. Perhaps most critically, it is the most common cooking oil in Asia, with India, China, and Indonesia accounting for nearly 40% of all palm oil consumed worldwide.
The secret to palm oil’s popularity mostly boils down to its incredibly cheap production costs. Palm oil is a very productive crop, so it has higher returns in terms of land and labor requirements versus other oil crops. The world devotes nearly 750 million acres to oil crop production. Palm oil accounts for around 6% of this land use, yet is responsible for 36% of the world’s total vegetable oil supplies.
Global production of palm oil has more than tripled from around 24 million metric tons in 2000/01 to an estimated 73 million in both 19/20 and 20/21 crop years. However, both mark a decline from 18/19 production of 74 million, with top producers Indonesia and Malaysia struggling to increase output amid weather hiccups, labor shortages, and other Covid-related fallout. At the same time, global stockpiles of all vegetable oils have gotten tighter.
Top producer Indonesia and number 2 producer Malaysia are also battling skyrocketing food inflation which is being fueled to a large degree by edible oil prices. One answer has been to impose stiff export duties on palm oil exports, which in turn has pushed up the cost of palm oil for importers. Additionally, Indonesia at the end of January issued a mandate for palm oil producers to set aside 20% of their crude palm oil shipments for local buyers, which further limited available export supplies.
Usually, palm oil enjoys a healthy discount to competitors like soybean oil, palm’s closest substitute for food and fuel. It’s typically the cheapest vegetable oil but as global supplies have tightened, the discount has been almost completely erased with palm oil prices up more than +50% in the last year. In fact, new record-high palm oil prices have recently made it more expensive than soybean oil and sunflower oil in some instances. A year ago, benchmark crude palm oil (CPO) was trading at a $74 per/metric ton discount to soybean oil and a $272/mt discount to sunflower oil, according to Reuters.
This price convergence has made palm oil less appealing to some importers. For instance, India’s imports of palm oil in January plunged more than -40% versus last year, while soyoil imports surged +341% and sunflower oil imports doubled. Overall, India’s vegetable oil imports were up +16% in January. It’s worth noting that India, the world’s biggest edible oil importer, recently cut its import duty on crude palm oil imports, bringing it down to levels comparable to what’s imposed on soyoil and sunflowerseed oil.
Palm oil production is predicted to rebound in 2022, though insiders say output gains could struggle to keep pace with continued demand increases for vegoils in general. According to USDA’s February 2022 forecasts, the stocks-to-use ratio for the four major vegetable oils – palm oil, soybean oil, canola oil, and sunflowerseed oil – are set to tighten for a second season in a row, estimated at 8.2% in 21/22 versus 8.8% in 20/21 and 9.5% in 19/20. (Sources: USDA, Platts, Reuters, WorldInData)
