Edible oils are filling fuel tanks as well as bellies
Sep 17th 2011 | from the print edition
OIL markets are full of uncertainty. Asian demand is booming and doubts abound over the ability of supply to match the world’s appetite. What goes for crude oil also applies to the stuff squeezed out of vegetable matter.
The price of stir-frying and dressing a salad has rarely been higher. Over the past decade the price of vegetable oils has all but quadrupled. Like other commodities, prices hit records in 2008. The subsequent slump is now forgotten: prices are back close to the peaks. Glencore, the world’s biggest commodity trader, may be about to confirm the industry’s allure: rumours are flying that it is mulling an investment in KS Oils, an Indian edible-oil firm.
Kona Haque of Macquarie, an Australian bank, points to two structural factors behind oil’s sizzle: China and biodiesels. A planet with more mouths to feed and deeper pockets has led to rapid growth in consumption of vegetable oils as well as grains and meat. And although the rapid surge in demand for oils in China and the rest of Asia is slowing there is still plenty of scope for more growth.
In the past few years a new source of demand has emerged for vegetable oils. Biodiesel production has rapidly accelerated and now consumes over a tenth of the global vegetable-oil crop. Depending on the crude-oil price and governments’ enthusiasm for mandating biofuels it could account for as much as a fifth by 2020, according to Peter Thoenes of the UN Food and Agriculture Organisation.
The effect of growing demand for the two main types of vegetable oil, palm and soya (see chart), is amplified by supply problems. In the case of soya, competition for land is the main concern. Farmers in America, the world’s top exporter, and Brazil, in second place, are switching to maize as sky-high prices make it more attractive.
Palm oil, also used to make soaps and cosmetics, comes almost exclusively from Indonesia and Malaysia. It suffers from even more acute supply problems. Already intensively cultivated and mechanised, there are few opportunities for farmers to increase output by improving yields on existing acreage. Developing and rolling out new higher-yielding strains is much easier and quicker for annual crops like wheat than for perennials such as palm trees that take time to mature and will bear fruit for many years.
Finding more land has unpalatable costs. Environmentalists point out that the spread of palm-oil plantations is the greatest threat to forests in Indonesia and Malaysia. In May Indonesia introduced a two-year moratorium on forest clearance in return for $1 billion, as part of a bilateral climate deal with Norway. But loopholes and exemptions mean that it may not slow down deforestation much. Like its crude counterpart, the march of the vegetable-oil business is not easily resisted.