A Global Challenge: Markets and Oil Palm Expansion Presentation to ZSL by James Fry, LMC International, Oxford www.LMC.co.uk
The dilemma created by official policies and the law of unintended consequences1. The widespread adoption of policies to promote biofuels has generated a sequence of unintended consequences, notably as regards oil palm.2. Today, I will describe how demand for biodiesel and ethanol has created pressure on land use, after decades in which yield increases matched the growth in the global demand for crops.3. I will also demonstrate how the special nature of biofuel demand has distorted the balance in the oilseeds sector between different oil crops.4. I will conclude with a some thoughts about the implications for future policy and policy reform.
Global grain areas fell, while oil crop areas(including oil palm) rose, between 1980 and2000. The net change overall was minimal. 40 80 Cumulative area change (million hectares) 30 60 Area change (million hectares) 20 40 10 20 0 0 -10 -20 -20 -40 -30 -60 1980 1985 1990 1995 Annual grains Annual oilseeds Cumulative grains Cumulative oilseed
Since 2001, both grain and oilseed areas haverisen. The net increase worldwide was over 70million hectares by 2008 (10 million ha./year). 30 120 Cumulative area change (million hectares) 20 80 Area change (million hectares) 10 40 0 0 -10 -40 -20 -80 -30 -120 1980 1985 1990 1995 2000 2005 Annual grains Annual oilseeds Cumulative grains Cumulative oilseed
Biofuels were the main driver of this increase.The surge in biofuel use lifted annual growth inoilseeds and grain demand from 1.5% to 2.3%. CAGR 350 1.5% 2.3% 300 1990s 2000s 250Million tonnes 200 150 100 50 0 Grains & Oilseeds Food Feed Fuel
Vegetable oils have been particularly affectedby this change. Non-food uses now accountfor over 20% of annual vegetable oil demand. 160 140Consumption (million tonnes) 120 100 80 60 40 20 0 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 Food Use Non-Food Use
Biofuels have pulled demand growth rates foroil ahead of those for protein meal. This booststhe reliance upon high oil-content crops. 300 150Meal in Soymeal Equivalent (million tonnes) 250 125 Oil (Million Tonnes) 200 100 150 75 100 50 50 25 0 0 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Meals, Soymeal Equivalent Oils
Among oil-bearing crops, oil palm’s oil yield/ha.averages five times that of rapeseed, six timesthat of sunflower and seven times soybean’s. 4.0 3.5 3.0Oil yield, tonnes per hectare 2.5 2.0 1.5 1.0 0.5 0.0 Oil Palm Rapeseed Sunflower Soybean
In contrast, oil palm has by far the lowest mealcontent of leading oilseeds. Hence, oil palm isthe oil crop best placed for the new biofuel era. 90% 80% 70%Meal content of crop output 60% 50% 40% 30% 20% 10% 0% Oil Palm Rapeseed Sunflower Soybean
Biofuel demand has not only raised the area under cultivation, it has also tilted the demand within oil crops towards oil palm.1. Biofuels are different from other forms of demand for oilseed products, in that their consumption is driven by policy, not by income growth.2. Until the 1990s, oil and meal demand worldwide used to increase at similar rates to one another as incomes rose; therefore the world needed to balance the growth of the different oilseed crops.3. Biofuel demand expands without generating any associated boost to meal demand. Thus, biofuels have tilted the balance of world demand towards high oil/low meal content crops, notably oil palm.
Since vegetable oils are close substitutes to one another in many uses, it actually matters little which oils go to biofuels.1. In countries such as China and India, there is strong evidence that the pattern of vegetable oil demand is highly sensitive to price relativities between the oils.2. When palm oil is at a larger discount than usual to soybean oil, its main competitor, it very quickly (within weeks) gains market share in food uses.3. Biofuel policy favours rapeseed and soy oils, but the diversion from food (2/3 of EU rapeseed oil goes to biodiesel) leaves a hole that other oils fill. Palm oil is well placed to fill the food gap, in view of limited sun oil supplies, its non-GM origins and natural hardness.
This diagram illustrates the prompt reaction ofIndian oil importers to changes in the pricerelativities between palm oil and soybean oil. 105% 100% 90% Palm Oil % of (Palm + Soy Oil) ImportsCif Tariff-Paid CPO/SBO Price Ratio . 95% 90% 80% 85% 80% 70% 75% 70% 60% 65% 60% 50% 55% 50% 40% Q4 2003 Q4 2004 Q4 2005 Q4 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010 Duty-paid CPO Import Price as % of SBO CPO % of SBO+CPO Imports
In the first half of the 2000s, there was no linkat all evident between the prices of petroleumand agricultural products. (Here they are indices.) 140 120 100Index, 1999-2009 = 100 80 60 40 20 0 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Palm Oil Wheat Maize Soymeal Brent Crude
Since 2007, a link has emerged. This link isclearest for the two biofuel raw materials (i.e.,maize and vegetable oils) in this diagram. 300 250Index, 1999-2009 = 100 200 150 100 50 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Palm Oil Wheat Maize Soymeal Brent Crude
Within the agricultural sector, the strongestlinks that have emerged with petroleum pricesare those of vegetable oils (in a price band). 1,600 1,400EU Prices, US$ per tonne 1,200 1,000 800 600 400 200 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Brent Crude Palm Oil Soy Oil Rapeseed Oil
Why do biofuels have this strongimpact on vegetable oil prices?
Biodiesel use in Germany and the US, the twolargest biodiesel users, responds to the premiaof biodiesel (and thus vegetable oil) vs. diesel. 500 300 Monthly Biodiesel Demand, 000 tonnes 460 250 Premium, US$ per tonne 420 200 380 150 340 100 300 50 260 0 220 -50 180 -100 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 US + German Demand Average US & German Biodiesel Premium
Explaining how the “tail” of biofuels “wags the dog” of vegetable oil prices.• Food and feed demand are income-elastic. Biofuel use is price-elastic, at least in some major markets.• Unlike food, where you cannot stop or postpone use, biofuel demand can be deferred until pricing improves.• When biofuels absorb a large enough share of global world demand for a particular crop, short run swings in biofuel use are enough to establish a price link.• Once a biofuel link exists for one crop, then, through substitution in output (as farmers switch their crops) and in demand (e.g., between feed grains, or between different vegetable oils in food), the price link with the petroleum sector extends to other crops.
Is there a feedback from current prices and short run profitability to oil palm plantings?• Oil palm plantations behave like producers of the other agricultural crops.• They respond to price signals and compare the profitability of oil palm with alternative opportunities.• It might be expected that the special nature of tree crops, which take several years before their first output appears, would mean that producers would be quite cautious about reacting too quickly to indications of short run profitability.• Therefore, I present some basic data about the feedback from prices (a proxy for short run profitability) to plantings in both Malaysia and Indonesia.
In order to understand oil palm plantings, I willstart with data on Malaysian area growth. Wesee how it fluctuates around a declining trend. 12% 10%% Annual Growth 8% 6% 4% 2% 0% 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 % Growth in Malaysian Area Trend Growth in Area
Real (inflation-adjusted) palm oil prices, too,have been fluctuating around a falling trend,declining on average by over 2% per annum. 2,500Real 2008 US$/tonne, EU CPO price 2,000 1,500 1,000 500 0 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Comparing proportional deviations from trendsof the two series, we find a very clear feedbackfrom prices to area expansion. 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Deviation of Plantings from Trend Deviation of Prices from Trend
Indonesian oil palm seed purchases tell a verysimilar story. They respond immediately to highCPO prices, as happened in 2008 and 2010. 250 3,000 Malaysia CPO price, Ringgit/tonne 200 2,400 Millions of germinated seeds 150 1,800 100 1,200 50 600 0 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Seed supply in Indonesia CPO price
There is very powerful evidence of a rapid feedback from prices to oil palm plantings.• In view of the evidence presented here, one must conclude that (via the biofuel link), policy has ensured that high petroleum prices are translated into high CPO prices, and these high CPO prices are translated into a rapid rate of expansion in oil palm areas.• Initial data on seed sales in Indonesia in 2011 reveals that, notwithstanding the proposed moratorium and pressures for sustainable practices, the rate of area expansion will be very significant this year.• It seems clear that the carrot of high prices is proving more powerful than the stick of sanctions in influencing the adoption of sustainable production practices.
A textbook example of the application of the law of unintended consequences• I imagine that policy-makers never intended to create a price link between vegetable oils and mineral oils.• Likewise, I am fairly certain that they never gave much thought to the implications of generating a new demand for oils, without a parallel demand for protein meal. They were more concerned instead to devise new means of supporting EU and US oilseed farmers.• However, unless dramatic changes are made in policies, I can see no way in which to avoid further pressure to boost output of high oil content crops, nor to slow the expansion in oil palm areas, whether in South East Asia, West Africa or Latin America.
If I could wave a magic wand, I would ….• Halt biofuel policies that take no account whatsoever of their consequences. I put mandates top of this list.• Next, I would use policy to pursue the true objectives behind renewable fuels, namely the reduction in global warming. I favour the application of comprehensive and tradeable carbon taxes/credits to promote energy efficiency in homes, etc., in an even-handed way.• I would implement direct annual payments to existing populations to protect HCV areas to compensate them for not clearing land. I would not pay governments.• In terms of practicality, the first should be the simplest to achieve and could well be the most effective.
• Thank You • www.LMC.co.uk • Acknowledgements: EIA, IMF, Jacobsen, MPOB,• National Biodiesel Board, Oil World, OPEC, Public Ledger, • SEA, TNS, UFOP, US Commerce Dept., USDA, World Bank