The Chain: Palm Prices Up, Production and Consumption Down; Soy Crushing Palm

Palm Prices Up, Production and Consumption Down

CPO prices rallied 6.9% during the month of March. Some national governments are viewing the higher prices as sources of tax revenue, while others want to increase taxes to decrease demand, for various reasons – including to reduce the impact of palm oil production on biodiversity and climate, and to protect domestic vegetable oil industries.

The U.S. Department of Agriculture reports that global production from February 2015 to January 2016 decreased an estimated 500,000 metric tons compared to the period from March 2015 to February 2016, due in large part to El Nino’s negative impact on yields. That was a reduction of about 1.9%, down from 62.2 million metric tons to 61.7 million metric tons. Malaysian production is down year-over-year from 20 million metric tons to 19.5 million metric tons over the same period. Meanwhile Indonesian, Thai, Colombian, and Nigerian palm production remain static at 33, 2.2, 1.17, and 0.97 million metric tons respectively.

For a variety of reasons, palm oil consumption in key countries is also down over the past month. Chinese consumption is decreasing as consumers’ preference for soybean oil continues to increase. Price-sensitive Indian consumers are switching to other vegetable oils in reaction to new Indian taxes on palm oil imports in place since September, 2015, (Table 1).

Table 1: Palm Oil Consumption by Country (thousand metric tons)*

Country Feb
2016
March
2016
India 10,025 9,750
Indonesia 8,620 8,620
EU 6,850 6,850
China 5,750 5,550
Malaysia 3,280 3,280
Pakistan 3,185 3,185
Thailand 1,990 1,990
Egypt 1,540 1,540
Nigeria 1,540 1,540
Bangladesh 1,400 1,400
US 1,129 1,174
Colombia 945 945
Burma 860 860
Philippines 825 825
Russia 800 800
Other 13,787 13,787
TOTAL 62,526 62,096
*All figures are 12-month moving average

Ending palm oil stocks are mostly stable globally month-over-month, except in Malaysia where stocks have decreased 100,000 metric tons. There, the production decrease resulted in traders selling inventories, thus decreasing the country’s overall palm oil stock. As a result, Malaysia’s annual palm oil exports for the same time period have decreased from 18.05 to 17.65 million metric tons. The EU and India palm oil stocks have seen a slight increase.

Indonesia, Papua New Guinea, Benin, and Guatemala palm oil exports have remained stable. Imports to India and China, however, have decreased from 9.625 to 9.425 and from 5.7 to 5.5 million metric tons respectively. India’s consumer demand is highly price sensitive, and with the added palm oil import tax, consumers are switching to lower-cost domestically produced vegetable oils. Chinese consumers have a growing preference for soybean oil for livestock feed. Global imports have decreased from 45.441 to 45.086 million metric tons.

U.S. palm oil demand has increased slightly, with imports over the same timeframe up to 1.225 from 1.18 million metric tons.

Supply-Side: CPO and Taxes

Malaysia raised its tax on crude palm oil exports to 5% for April 2016, ending a duty-free policy held since May 2015. Malaysia’s new reference price is RM 2,500.34 (US$607.17) per ton for April. This means that a price above RM 2,250 incurs a tax, which starts from 4.5% and can reach a maximum 8.5% on all palm oil exports, if CPO export prices exceed RM 3,450.

This rising export tax on CPO means that, starting in April 2016, Malaysian producers will be encouraged to sell to downstream domestic Malaysia refiners. Before the tax was reinstated, refiners in Indonesia had been sourcing CPO from Malaysia, resulting in palm oil refinery capacity in Malaysia dropping from 80% to 50%.

Supply-Side: Monetary Policy

In a play to be sufficiently supportive of economic activity, the Malaysian Central Bank chose to keep its overnight interest rate at 3.25% at its recent 9 March 2016 meeting. Meanwhile, the Bank Indonesian cut its base rate 0.25% to 6.75% on 17 March 2016 in an effort to boost its economy. Analysts now expect Indonesia to continue policy easing by cutting its rate an additional 0.25% by Q2 2016. In the medium-term, unless productivity increases, inflationary risks may build as rate cuts multiply. In the near-term, CRR expects Indonesia to respond to Malaysia’s export tax with further incentives to increase domestic refining utilization rates.

This means that as Indonesia and Malaysia compete to expand refined palm oil exports, they will continue to provide internal financial incentives to encourage value-added palm oil refining of domestically sourced CPO in country before exporting to global markets.

The Palm-Soy Crush spread

A crush spread is when traders and manufacturers switch from one oil to another due to price consideration. According to US Department of Agriculture oilseeds trade data, soybeans are winning the El Niño “crush spread” over palm oil. Among the 20 largest oilseed exporters and importers, year over year, soy demand is increasing while palm oil demand is flat or decreasing in some markets.

The rising tide of soy can be seen across the global commodities landscape. In Argentina, soybean meal exports are up 1.1 million tons to 32.8 million, and soybean oil exports are up 165,000 tons to 5.9 million. In Brazil, soybean exports are up 1.0 million tons to 58.0 million on strong demand mainly from China. In Malaysia, palm oil exports fell from 400,000 tons to 17.7 million on a lower production forecast.

The trend is also reflected in consumer countries. In China, soybean imports are up 1.5 million tons to 82.0 million, reflecting a strong pace of trade in the first half of the marketing year and continued strong demand for protein meal. Meanwhile, palm oil imports are down 200,000 tons to 5.5 million. In the European Union, soybean meal imports are up 400,000 tons to 20.7 million, in response to larger supplies of competitively priced Argentine meal. Soybean imports are down 500,000 tons to 13.2 million, as increased meal imports reduce the need for soybeans for crush. In India, palm oil imports are down 200,000 tons to 9.4 million, as global palm oil supplies tighten. Similar trends are seen in Mexico, South Korea, Pakistan and Russia.

IOI Update: Unilever Response 

Following up from RSPO’s suspension of IOI last week, on 31 March 2016 Unilever reacted by stating that the suspension puts IOI in breach of their policy. Unilever, the world’s largest single palm oil consumer company, is now in the process of disengaging with IOI over the next three months. At the same time, Unilever is engaging with IOI and relevant NGOs to address these concerns.