In a paper of this nature I do not have to state the case for palm as a biofuel of choice. However, there is a widely held misconception that the cultivation of palm is harmful to the environment and that it destroys the tropical rain forests. With respect this is a misconception based on out-dated information. No plantation company in its right mind will resort to Slash & Burn these days. Degraded forests are cleared and re-planted in a sustainable manner and High Conservation Value areas are suitably preserved.
The economic benefits in terms of employment generation and wealth creation are too great to be ignored. The countries and the people of the tropical, equatorial lands have a right to development and to prosperity. They should not be made to pay for the past sins and excesses of people in the more temperate lands on our planet.
There is also a very strong argument that the productivity of palm trees is so high that it leads to the best use of land in a world where arable land was thought to be in short supply.
There is also an argument that prices of agricultural commodities have been falling in real terms over the last 30 years. Agriculture has become the last resort of the uneducated and the under-employed. The sons of farmers do not wish to embrace farming as a profession. They would rather work in the cities. Therefore there is a crying need to underwrite remunerative prices for farmers and planters. That job can either be done by what is called “ Domestic Supports ” or Minimum Support Prices or by finding a market based solution. The use of palm oil as a biofuel is such a market based solution.
The Case for Palm as a Biofuel
World production of oilseeds is expanding as advances are made in technology as well as in acreage. On average, world demand for vegetable oil is expanding at about 6 million tonnes per annum – 4 million tonnes of edible demand and 2 million tonnes of biofuel demand. In some years, with good weather and rainfall, palm oil production alone will expand by more than 5 million tonnes, in other words, by more than the expansion in food demand. In order to preserve remunerative prices, we therefore need the additional demand from biofuels. 5
Otherwise prices will collapse and will have to be either supported by the tax payer – as in the USA and the EU, or farmers will be driven to distress and impoverishment.
World Vegetable Oil Incremental Supply and Demand
In the current oil year, October 07 to September 08, northern hemisphere crops have shaped up extremely well and there have been bumper crops of rapeseed and sunseed whilst soya production in USA has also been good when compared with the planting problems of June. On the other hand, the very high prices of the first quarter of 2008 led to an outcry against biofuels. The new regulatory and tax regimes for biodiesel in Germany and parts of the EU also led to a scaling back of biodiesel production and demand.
My estimate is that on an annualised basis, for the oil year 2007-08 we have already lost 1 million tonnes of food demand and about 500,000 tonnes of biodiesel demand as a result of high prices. Some of this lost demand may be re-captured in 2008-09 but that is going to be the function of price.
For the oil year October 2008 to September 2009, we are already seeing big increases in the production of sunseed and rapeseed.
CHINA
I wish to make a specific point about China. You will have noticed that the sell-off in our markets started from the domestic market in China. I believe many analysts have missed out or overlooked a very significant statistical point with regard to China.
The 2007 Rapeseed crop in China was a disaster. My estimate is that the crop was around 8 million tonnes, at least 2 million tonnes lower than official China government estimates ( which were scaled down from earlier 11 million tonnes ).
This was one of the reasons for the fast pace of 2007 imports by China and the bullishness that came from that direction. The 2008 Rapeseed crop in China is much better and is estimated at a genuine 11 million tonnes. Most analysts never revised their 2007 figures downwards and hence they are taking the 2008 increase at ( 11 minus 10 ) 1 million tonnes.
In actual fact, the 2008 increase over 2007 is 3 million tonnes. This explains why the domestic market in China is over-supplied and suffering from indigestion. The soybean crop in China is also better than expected and with good weather should be in excess of 18 million tonnes. On the other hand, food demand grew in 07-08 by only 3 million tonnes and biodiesel demand by 1 million tonnes. Hence for 07-08, Incremental Supply exceeded Incremental Demand by almost 1.5 million tonnes and the bulk of this excess has come in the second half of the year.
For 08-09, my initial expectation is that food demand should grow again at 4 million tonnes and biodiesel demand by 2.5 million tonnes. I am presuming that mandates will come into force in certain countries. If that were to be the case, Incremental Supply will exceed Incremental demand by a small margin. However it must be borne in mind that all figures for 08-09 are a guess at this early stage. Palm production may or may not be as high as we estimate and bio diesel demand may be higher or lower than expected.
There are several variables with regard to 08-09. The economic outlook for the big population countries is less than what it used to be a year earlier. Prices are already very high and the morale of consumers is lower than a year ago.
The mis-guided outcry against biofuels and the Food versus Fuel debate has eroded or postponed the various Mandates and Incentives that are required to make biodiesel attractive. In the final analysis, Demand growth will depend on Price. What is amply clear is that Biofuel Demand is absolutely essential to ensure remunerative prices. Were it not for biofuel demand, vegetable oil prices would be lower and the industry would not expand and create wealth on the same scale.
PRICE OUTLOOK
We have already seen a big correction in prices but it may not be enough to ensure strong growth in demand. Let us remember that RBD Olein at US$ 900 per tonne FOB is a very high price in a historical perspective. Also, vegetable oils need to be cheaper than fossil fuels if we are to make bio diesel profitable and thus to expand its market.
Ultimately, commercial success is the best guarantee for demand expansion. We have seen in recent months in the case of Corn Ethanol in the USA. Mandatory blending of Ethanol has been doubled by the tonnage of Voluntary blending which has been triggered by the lower price of ethanol as compared with gasoline. We used to see this happen in the case of Rape diesel in Germany until de-taxation was removed. At present bio diesel production in Argentina and in Indonesia is facilitated by virtue of the differential export taxes that are levied. It remains to be seen how this will change when export taxes are reduced.
Export Taxes
On that note, it must be said that the governments of Indonesia and Malaysia did their palm oil industries a huge dis-service when they levied punitive taxes on palm.
The high export tax in Indonesia was particularly unfortunate and immoral. Consumers in developing nations like India, Pakistan, Bangladesh and others in North Africa and Asia had every reason to feel betrayed and exploited. What face will the Indonesian government have when some of these countries now decide to levy or to re-impose punitive import taxes on palm oil?
In Argentina even today, the government, in its mindless lust for revenue, is trying to strangle the industry. Doing business as an oilseed crusher or a Grain exporter in Argentina is an ordeal. Their government reminds me of the famous words of the actress Zsa Zsa Gabor “ I am a wonderful housekeeper; each time I leave a man, I keep his house ! ”
Prices over the next few weeks
We have at present a deadly cocktail of rising production combined with some demand rationing. In such circumstances, prices have to go to the level where they create strong demand growth. At the same time, markets have been over-sold and just at present, the newsflow has turned positive. There are uncertainties with regard to the US crops, relating to a lack of moisture. The India monsoon appears to be withdrawing earlier than in normal years. A lot is riding on the time when the Palm
High Cycle will finally turn.
Until the High Cycle of palm oil production persists, big production and big stocks will weigh on the market. The pressure will come from sun oil and soya oil, particularly soya oil which is at an unsustainable premium to palm oil. The larger than normal stocks of beans, meal and oil in Argentina will need an outlet and world prices will have to do their job. So far, palm has been very fleet-footed and its lower price has managed to grab market share and so keep its stocks at less than burdensome levels.
If crude oil prices stabilise around US$ 100 per barrel with a 10 percent range, then I believe CPO futures need not go lower than 2200 Ringgits for the next few weeks. At that level we should see strong demand growth. Soya oil, on the other hand, needs to decline in price substantially from its current levels. If biofuel use of vegetable oils was not around, the price level would be unthinkable.
I am not going to make a medium term price forecast today. However, I must warn you not to get too bearish. The prognosis for 2009 will depend on many new factors and I shall discuss these in my forthcoming speeches – on 11th September in Singapore and later on 28th September at Globoil India in Mumbai.
This paper was meant to explain Why palm oil needs that additional biofuel demand to ensure remunerative prices and to ensure its long term success. It is a pity that major plantation companies have enriched themselves from high CPO prices but have refused to invest in bio diesel or to invest in creating a market for biofuels.
Almost all plantation companies, with just one or two honourable exceptions, have kept their heads down rather than propagate and explain the case for palm diesel. MPOC is doing a great job but the plantation companies need to do much more. Have they never heard of a term called “ Enlightened self interest ? ”. The current market situation exemplifies what I have said today. We must all realise how important it is for us to ensure that biofuels remain viable and acceptable.
The Round Table on Sustainable Palm Oil is doing a sterling job in this direction even though many in the RSPO do not like palm bio diesel and would rather confine it to edible use.
My point is Unless you pay remunerative prices to the growers, you will not get a flourishing industry that creates wealth and cares for the environment. Let us always remember that the biggest polluter of the environment is poverty. We do not need the crocodile tears of people who wish to keep the developing world poor but environmentally pure.
Poverty is our common enemy. Let us make it our mission to enrich our farmers and our plantation workforces. They are our frontline. Palm is a relatively young industry but a phenomenally successful one. Let us keep it that way. I wish you all great success in the weeks and months ahead.
GOOD LUCK and GOD BLESS. (Courtesy: Solvent Extractors Association of India website)
