1. Biofuel policies aimed to promote biofuel production have unintentionally increased pressure on land use and distorted the balance between oilseed crops by favoring those with high oil content like oil palm. 2. The biofuel demand for vegetable oils independent of meal demand has tilted cultivation towards oil palm which has much higher oil yield and lower meal content than other oilseeds. 3. High palm oil prices driven by the link between vegetable oil and petroleum prices through biofuel use provide strong incentives for rapid expansion of oil palm plantations in Southeast Asia.

1. A Global Challenge: Markets and
Oil Palm Expansion
Presentation to ZSL by
James Fry, LMC International, Oxford
www.LMC.co.uk

2. The dilemma created by official policies
and the law of unintended consequences
1. 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.

3. The global battle for acres

4. Global grain areas fell, while oil crop areas
(including oil palm) rose, between 1980 and
2000. 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

5. Since 2001, both grain and oilseed areas have
risen. The net increase worldwide was over 70
million 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

6. Biofuels were the main driver of this increase.
The surge in biofuel use lifted annual growth in
oilseeds and grain demand from 1.5% to 2.3%.
CAGR
350
1.5% 2.3%
300
1990s
2000s
250
Million tonnes
200
150
100
50
0
Grains & Oilseeds Food Feed Fuel

7. Vegetable oils have been particularly affected
by this change. Non-food uses now account
for over 20% of annual vegetable oil demand.
160
140
Consumption (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

8. Biofuels have pulled demand growth rates for
oil ahead of those for protein meal. This boosts
the reliance upon high oil-content crops.
300 150
Meal 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

9. Among oil-bearing crops, oil palm’s oil yield/ha.
averages five times that of rapeseed, six times
that of sunflower and seven times soybean’s.
4.0
3.5
3.0
Oil yield, tonnes per hectare
2.5
2.0
1.5
1.0
0.5
0.0
Oil Palm Rapeseed Sunflower Soybean

10. In contrast, oil palm has by far the lowest meal
content of leading oilseeds. Hence, oil palm is
the 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

11. 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.

12. 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.

13. This diagram illustrates the prompt reaction of
Indian oil importers to changes in the price
relativities between palm oil and soybean oil.
105%
100% 90%
Palm Oil % of (Palm + Soy Oil) Imports
Cif 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

14. Price links created by biofuel policies

15. In the first half of the 2000s, there was no link
at all evident between the prices of petroleum
and agricultural products. (Here they are indices.)
140
120
100
Index, 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

16. Since 2007, a link has emerged. This link is
clearest for the two biofuel raw materials (i.e.,
maize and vegetable oils) in this diagram.
300
250
Index, 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

17. Within the agricultural sector, the strongest
links that have emerged with petroleum prices
are those of vegetable oils (in a price band).
1,600
1,400
EU 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

18. Why do biofuels have this strong
impact on vegetable oil prices?

19. Biodiesel use in Germany and the US, the two
largest biodiesel users, responds to the premia
of 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

20. 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.

21. The response of oil palm areas to prices

22. 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.

23. In order to understand oil palm plantings, I will
start with data on Malaysian area growth. We
see 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

24. Real (inflation-adjusted) palm oil prices, too,
have been fluctuating around a falling trend,
declining on average by over 2% per annum.
2,500
Real 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

25. Comparing proportional deviations from trends
of the two series, we find a very clear feedback
from 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

26. Indonesian oil palm seed purchases tell a very
similar story. They respond immediately to high
CPO 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

27. 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.

28. Implications for policy

29. 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.

30. 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.

31. • 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

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