It’s interesting to see that Nutella maker, Ferrero, publicly defends palm oil. This is the link to the article.
There are many studies that say palm oil is bad for health when it’s consumed as food. But, there are also other studies that refute that finding. In 2013, I spoke to Richard Fung, who is the IR director at Golden Agri Resources. He said it could be a conspiration among other vegetable oil producers to hurt palm oil demand. Other vegetable oils, such as soybean oil, rapeseed oil, are produced in several countries, while palm oil is mostly produced in Indonesia and Malaysia. By saying that palm oil is bad for health, it can reduce palm oil consumption and shift it to other vegetable oils, benefiting the producers. So, it’s economic interest at play. I don’t know whether it’s true. Richard was defending palm oil, which was his company’s main product.
Vegetable Oil Consumption
In terms of vegetable oils consumption, palm oil has 34% share, soybean oil 32%, rapeseed oil 15%, sunflower oil 7.5%. This is the stats I have in 2010. I don’t think the percentage has changed drastically since then. If anything, the percentage for palm oil should have increased relative to others. The price charts in subsequent section are all taken from outdated broker reports. I don’t have the latest version, but I don’t expect the relations to have changed materially.
Vegetable Oil Price
Since many studies say palm oil consumption is bad for health, why is it still the most consumed type of vegetable oil in the world? The answer is that palm oil is often the cheapest vegetable oils. Here is the outdated price chart among the vegetable oils. The prices have fallen substantially from the level in 2011, but palm oil remains the cheapest.
Why is palm oil the cheapest vegetable oil? Because it has the lowest production cost. Firstly, one hectare of land can produce 4-5 tons of crude palm oils, but only 0.4-0.5 tons of soybean oils. Note, palm oil yield is nearly 10x soybean oil yield! Secondly, palm oil is mostly produced in Indonesia and Malaysia, where the labor costs are much cheaper. For soybean oils, US is the largest producer, followed by Brazil and Argentina.
Vegetable Oil Substitute
From 2013 to 2015, soybean oil price fell substantially due to oversupply.
As its price gap with palm oil narrowed, many analysts were saying that palm oil price would fall too because end market would switch to soybean oil, which only had small price premium and was considered healthier vegetable oil. We very doubt this theory of switching to substitute because vegetable oils are ingredient in producing food, and switching can affect the taste. Also, food manufacturer wouldn’t just switch from palm oil to other vegetable oils just because other oils are slightly cheaper. Many broker reports will mention this switching, but none can support the claim with data.
What happened to palm oil price during 2013-2015? As seen in the chart below, palm oil price was relatively stable in 2013, but fell in 2014-15. So, falling soybean oil price in 2013 did not affect palm oil price, but the correlation became high in 2014-15.
Checking with Nestle
We called up some large food manufacturers. One was Nestle Malaysia. We managed to fix a call with one of the directors. We couldn’t be so straight forward to ask such questions. If we did, they wouldn’t have agreed to take the conference call. We pretended to be an investor in Nestle Malaysia (it’s listed in Bursa Malaysia) and said we were concerned with the source of palm oil that Nestle was using as the industry was blaming palm oil for deforestation. We said we had a mandate to invest in companies that were environmentally friendly and used sustainable palm oil. That’s how we introduced ourselves and started the conversation.
When asked if they would switch to other vegetable oil to save cost, the straight answer is No. They wouldn’t do it because each vegetable oil has different composition. Switching can affect the taste too. That’s aligned with what we thought about all this substitution that the market kept echoing.
We told our finding to some brokers whom we were close with. One said when buying cooking oil, some consumers might still switch because they consider soybean oil as healthier and the price difference with palm oil nearly disappear. We all don’t have any data to support, so, we stick to what we think. My fund manager and I believed that the impact from substitution was not material.
Ferrero defending palm oil
Now, in this article that Ferrero defends palm oil, they said the same thing. Nutella relies on palm oil for its smooth texture and long shelf life. Other vegetable oil substitute would change its character. This matches with what I believe. A branded food manufacturer will not take such risk to save cost.
Ferrero also mentioned that palm oil is the cheapest vegetable oil. It uses about 185k tons of palm oil a year, and replacing it with those substitutes could cost an extra USD 8-12 million annually. There was only a short period in which soybean oil was cheaper than palm oil. For most of the time, palm oil is the cheapest. So, food manufacturers are likely stick to palm oil if they already are using it.
Palm Oil Demand
Now you understand that palm oil is the cheapest vegetable oil, and food manufacturers are not likely to switch to other vegetable oils despite many studies and criticism out there on how bad palm oil is for health.
What do you think of its past demand and future demand? These charts give you some idea.
Global vegetable oil consumption grew at the rate of 5% per year from 2000 to 2010 , while palm oil consumption grew at the rate of 7% per year. That means palm oil is slowly increasing its market share in vegetable oil consumption. Palm oil’s market share was 27% in 2000, but increased to 34% in 2010.
Going forward, world population continue to grow, and developing countries continue to see increasing middle class population. Consumption per capita rises with GDP per capita. Since the 1970s, vegetable oil consumption has grown consistently in line with GDP growth and world population growth. Therefore, it’s safe to assume that vegetable oil demand will continue to grow at low single-digit rate.
To feed the growing population, which vegetable oil has such capacity? Both palm oil and soybean oil have nearly 70% of the market share. But, as I mentioned above, one hectare of land can produce 10x more palm oil than soybean oil. Therefore, palm oil is a more productive choice to feed our world than other vegetable oils.
That’s why I never worry about palm oil demand even though monthly palm oil export from Indonesia and Malaysia can fluctuate widely. We know that fundamentally, it’s a staple food, and the world needs it. It’s the supply side and external factors that often drive the price.