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the Vegetable O by Dr James Fry, LM to PALMEX Thailand, www.LMC Oil Market Today MC International , September, 2011 C.co.uk
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Transcript of Dr. James Fry_lmc
Price and Supply-Demand Outlook in the Vegetable Oil Market Today
by Dr James Fry, LMC Internationalto PALMEX Thailand, September, 2011
www.LMC.co.uk
Demand Outlook in the Vegetable Oil Market Today
by Dr James Fry, LMC Internationalto PALMEX Thailand, September, 2011
www.LMC.co.uk
I will start by describing one of the most surprising changes in the behaviour of the world vegetable oil market, which has occurred within the past five years.
This is the way in which vegetable oils have become part of the petroleum complex, as regards pricing. I will explain why and how this has happened.
This has far-reaching consequences for the future behaviour of vegetable oil prices. In particular, while supply-demand balances do matter, they are less important than they used to be in setting oils prices.
Palm oil stocks are still the main driver of price differentials within the oils complex, and so I will
Outline of my presentation today
I will start by describing one of the most surprising changes in the behaviour of the world vegetable oil market, which has occurred within the past five years.
This is the way in which vegetable oils have become part of the petroleum complex, as regards pricing. I will explain why and how this has happened.
reaching consequences for the future behaviour of vegetable oil prices. In particular, while
demand balances do matter, they are less important than they used to be in setting oils prices.
Palm oil stocks are still the main driver of price differentials within the oils complex, and so I will
Outline of my presentation today
The revolution in vegetable oil price behaviour
The revolution in vegetable oil price behaviour
petroleum and vegetable oil prices. CPO was often cheaper than crude oil per tonne.
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Jan-03 Jan-04 Jan-05
Brent Crude Palm Oil
petroleum and vegetable oil prices. CPO was often cheaper than crude oil per tonne.
Jan-05 Jan-06 Jan-07
Soy Oil Rapeseed Oil
Palm oil was actually less expensive than crude oil
vegetable oil prices to crude oil prices, within a price band with vegetable oils at a premium.
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1,000
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Jan-07 Jan-08 Jan-09
Brent Crude Palm Oil
vegetable oil prices to crude oil prices, within a price band with vegetable oils at a premium.
Jan-10 Jan-11
Soy Oil Rapeseed Oil
new price band, but their premium over crude petroleum has shrunk sharply in recent weeks.
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1,200
1,600
2,000
2,400
Jan-07 Jan-08 Jan-09Brent Crude Palm Oil
new price band, but their premium over crude petroleum has shrunk sharply in recent weeks.
Jan-10 Jan-11Palm Oil PKO CNO
see that, after a sharp correction after January, the CPO premium has settled near its average.
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500
600
Jan-07 Jan-08 Jan-09
CPO SBO CPO Average
see that, after a sharp correction after January, the CPO premium has settled near its average.
Jan-10 Jan-11
CPO Average SBO Average
We can now see very clearly that there is a price band in place, which became established in 2007.
When vegetable oil prices get too far above crude oil, a correction occurs, and typically quite fast. We saw such a correction in 2008 and again this year.
Since the floor of the band is set by crude oil prices, it seems likely that biofuels are the key to the link.
This view is reinforced by the evidence that lauric oils, which are distinct from the other oils and are not used in biofuels, are less closely tied to the new price band.
However, I suppose the link could be caused by basic commodity speculation, and so I now turn to examine
major revolution in vegetable oil pricing
We can now see very clearly that there is a price band in place, which became established in 2007.
When vegetable oil prices get too far above crude oil, a correction occurs, and typically quite fast. We saw such a correction in 2008 and again this year.
Since the floor of the band is set by crude oil prices, it seems likely that biofuels are the key to the link.
This view is reinforced by the evidence that lauric oils, which are distinct from the other oils and are not used in biofuels, are less closely tied to the new price band.
However, I suppose the link could be caused by basic commodity speculation, and so I now turn to examine
major revolution in vegetable oil pricing
Biodiesel demand has changed the
balance within the oil and meal sectors
Biodiesel demand has changed the
balance within the oil and meal sectors
oil ahead of those for protein meal. This boosts the reliance upon high oil
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1972 1975 1978 1981 1984 1987 1990 1993
Meals, Soymeal Equivalent
oil ahead of those for protein meal. This boosts the reliance upon high oil-content crops.
1993 1996 1999 2002 2005 20080
25
50
75
100
125
150
Oil (M
illion Tonnes)
Meals, Soymeal Equivalent Oils
If we look back 40 years, we see that, by coincidence, global demand for oils and meals grew in step with one another.
The feedback from income growth to oil demand (for food) and meal demand (for meat) meant that the global consumption of oils and meals rose in parallel.
Since 2000, world vegetable oil demand has grown faster than meal demand, with the divergence between the two curves widening steadily.
The best reason for the change has to be biofuels. They generate a demand for oils, but without any corresponding demand for protein meal.
demand for oils and meals were similar
If we look back 40 years, we see that, by coincidence, global demand for oils and meals grew in step with
The feedback from income growth to oil demand (for food) and meal demand (for meat) meant that the global consumption of oils and meals rose in parallel.
Since 2000, world vegetable oil demand has grown faster than meal demand, with the divergence between the two curves widening steadily.
The best reason for the change has to be biofuels. They generate a demand for oils, but without any corresponding demand for protein meal.
demand for oils and meals were similar
averages five times that of rapeseed, six times that of sunflower and seven times soybean’s.
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0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Oil Palm Rapeseed
averages five times that of rapeseed, six times that of sunflower and seven times soybean’s.
Sunflower Soybean
content of leading oilseeds. Hence, oil palm is the oil crop best placed for the new biofuel era.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Oil Palm Rapeseed
content of leading oilseeds. Hence, oil palm is the oil crop best placed for the new biofuel era.
Sunflower Soybean
rapid output growth. It has overtaken soybean oil to become the world’s most important oil.
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10
20
30
40
50
1975 1978 1981 1984 1987 1990 1993Palm Oil Palm Kernel Oil
Soybean Oil Sunflower Oil
Average Annual Growth 1975-2011:Palm Oil = 8.3%Palm Kernel Oil = 7.7%Rapeseed Oil = 6.2%Soybean Oil = 4.8%Sunflower Oil = 2.8%
rapid output growth. It has overtaken soybean oil to become the world’s most important oil.
1993 1996 1999 2002 2005 2008 2011Palm Kernel Oil Rapeseed Oil
Sunflower Oil
Now that we are in a world that craves more and more vegetable oil, and is doing so at a faster rate than its demand for meal, it wants more of the world oilseed output to come from a crop that gives us a lot of oil and relatively little meal.
The crop that best meets this need is called “oil palm”!
As a result, it is not simply because oil palm is a highly productive and costhas captured a greater share of world supply.
In reality, the world needsother oils, if it is to avoid the problems of large
growth plays to oil palm’s strengths
Now that we are in a world that craves more and more vegetable oil, and is doing so at a faster rate than its demand for meal, it wants more of the world oilseed output to come from a crop that gives us a lot of oil and relatively little meal.
The crop that best meets this need is called “oil
As a result, it is not simply because oil palm is a highly productive and cost-competitive crop that it has captured a greater share of world supply.
needs more palm oil, rather than other oils, if it is to avoid the problems of large
growth plays to oil palm’s strengths
Biodiesel demand is very sensitive to
the biodiesel premium over diesel
Biodiesel demand is very sensitive to
the biodiesel premium over diesel
quickly to swings in the biodiesel premium over diesel. This links biodiesel to diesel prices.
180
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500
Jan-07 Jan-08 Jan-09US + German Demand Average US & German Biodiesel Premium
quickly to swings in the biodiesel premium over diesel. This links biodiesel to diesel prices.
Jan-10 Jan-11-100
-50
0
50
100
150
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250
300
Premium
, US$ per tonne
Average US & German Biodiesel Premium
where biofuel users can pay the government money not to use biofuels if they get too costly.
40
50
60
70
80
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100
Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10Demand Biodiesel Premium
where biofuel users can pay the government to use biofuels if they get too costly.
Jul-10 Oct-10 Jan-11 Apr-11 Jul-11-50
50
150
250
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450
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Biodiesel Premium
over Diesel (U
S$/tonne)
Biodiesel Premium
Around the world, biodiesel users cut back demand when biodiesel became very expensive vs. diesel.
Some of the cutbacks were temporary, as blenders waited until biodiesel became cheaper. Some were caused by users “buying out” their mandates
In a few cases, governments responded to high food prices by reducing their legal mandate targets.
In Thailand, your government reacted to low palm oil output by cutting the mandate for a while.
The effect of all these changes was to pull biodiesel prices (and hence vegetable oil prices) closer to the price of diesel, narrowing the spread in the market.
high price differentials earlier this year.
Around the world, biodiesel users cut back demand when biodiesel became very expensive vs. diesel.
Some of the cutbacks were temporary, as blenders waited until biodiesel became cheaper. Some were caused by users “buying out” their mandates
In a few cases, governments responded to high food prices by reducing their legal mandate targets.
In Thailand, your government reacted to low palm oil output by cutting the mandate for a while.
The effect of all these changes was to pull biodiesel prices (and hence vegetable oil prices) closer to the price of diesel, narrowing the spread in the market.
high price differentials earlier this year.
Understanding vegetable oil pricesUnderstanding vegetable oil prices
I hope that I have persuaded you that you have to take account of biofuels today. In English, we talk about a “tail wagging the dog”. In oils today, the “tail” of biofuels, with only one eighth of world oil demand’ is waging the “dog” of the global vegetable oil market (with the other seven eighths of demand).
Because of the price band, petroleum prices are undoubtedly a major factor behind oils pricing today.
Vegetable oil stocks also influence prices. The recent period of low palm oil output has passed, and I will next study how the upturn is affecting stocks.
Finally, vegetable oils compete. I will illustrate this
price levels today now include biofuels
I hope that I have persuaded you that you have to take account of biofuels today. In English, we talk about a “tail wagging the dog”. In oils today, the “tail” of biofuels, with only one eighth of world oil demand’ is waging the “dog” of the global vegetable oil market (with the other seven eighths of demand).
Because of the price band, petroleum prices are undoubtedly a major factor behind oils pricing today.
Vegetable oil stocks also influence prices. The recent period of low palm oil output has passed, and I will next study how the upturn is affecting stocks.
Finally, vegetable oils compete. I will illustrate this
price levels today now include biofuels
Stocks and oil supplyStocks and oil supply-demand balances
in lifting growth in output of the main vegetable oils to 6 million tonnes worldwide in 2011/12.
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2006/07-2007/08 2007/08-2008/09 2008/09-2009/10Soybeans Rapeseed Sunflower
in lifting growth in output of the main vegetable oils to 6 million tonnes worldwide in 2011/12.
2008/09-2009/10 2009/10-2010/11 2010/11-2011/12Sunflower Palm Sum
growth and cause it to lag behind output growth, after two years when demand exceeded output.
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Demand Output
growth and cause it to lag behind output growth, after two years when demand exceeded output.
2008/09-2009/10
2009/10-2010/11
2010/11-2011/12
Output
oilseed stocks. Biofuel price sensitivity will be crucial to balancing world oil supply vs. demand.
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2008/09-2009/10
Oil in Seed Oil Output
oilseed stocks. Biofuel price sensitivity will be crucial to balancing world oil supply vs. demand.
2008/09-2009/10
2009/10-2010/11
2010/11-2011/12
Oil Output
Oilseed stocks are big enough to ensure high growth in world oil output, while high prices slow demand.
Within the world oil total, palm oil will make a bigger contribution to global production growth in 2011/12 than it did in 2010/11, rising 3.0
This increase will be crucial in keeping world supply expanding in line with the rise in global oils demand.
The key looking further ahead will be the speed of the revival in palm oil output growth. Newly mature areas and good rains in the past year should keep world year-on-year CPO production growth strong for a few more months, as I will now demonstrate.
Seed stocks provide a cushion for oil output
Oilseed stocks are big enough to ensure high growth in world oil output, while high prices slow demand.
Within the world oil total, palm oil will make a bigger contribution to global production growth in 2011/12 than it did in 2010/11, rising 3.0-3.5 million tonnes.
This increase will be crucial in keeping world supply expanding in line with the rise in global oils demand.
The key looking further ahead will be the speed of the revival in palm oil output growth. Newly mature areas and good rains in the past year should keep
year CPO production growth strong for a few more months, as I will now demonstrate.
Seed stocks provide a cushion for oil output
Malaysian CPO output growth in 2010 was a temporary aberration and that growth is back.
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1997 1999 2001 2003
Malaysian CPO output growth in 2010 was a temporary aberration and that growth is back.
2005 2007 2009 2011
Thai CPO output fluctuates than Malaysia’s, and we can also see the poor upturn in 2010.
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1997 1999 2001 2003Malaysia
Thai CPO output fluctuates than Malaysia’s, and we can also see the poor upturn in 2010.
2005 2007 2009 2011Malaysia Thailand
cycle has been spread throughout the world of oil palm all the way from SE Asia to S America.
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Q1.2009 Q3.2009 Q1.2010Malaysia Indonesia
cycle has been spread throughout the world of oil palm all the way from SE Asia to S America.
Q1.2010 Q3.2010 Q1.2011Indonesia Thailand Colombia
kernel output in 2010 and early 2011, which explains the recent wild swings in PKO prices.
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Q1.2009 Q3.2009 Q1.2010Malaysia Indonesia
kernel output in 2010 and early 2011, which explains the recent wild swings in PKO prices.
Q1.2010 Q3.2010 Q1.2011Indonesia Colombia
2010 was undoubtedly an unusual year, in that the year-on-year increases in both CPO and PK output were very modest by historical standards (which may have been a result of low fertiliser use in 2008reaction to high costs), and it ended with sharp yearon-year declines in Q4 production of CPO and PK.
Palm kernel output was hit harder than CPO in the downturn, but was displaying very strong growth again by the second quarter of 2011.
Looking at the growth patterns, we must be close to the peaks. Malaysia’s and Indonesia’s yeargrowth rates peaked in Mayof growth almost certainly touched its peak in July.
oil and palm kernel growth cycles.
2010 was undoubtedly an unusual year, in that the year increases in both CPO and PK output
were very modest by historical standards (which may have been a result of low fertiliser use in 2008-09 in reaction to high costs), and it ended with sharp year
year declines in Q4 production of CPO and PK.
Palm kernel output was hit harder than CPO in the downturn, but was displaying very strong growth again by the second quarter of 2011.
Looking at the growth patterns, we must be close to the peaks. Malaysia’s and Indonesia’s year-on-year growth rates peaked in May-June, while the Thai rate of growth almost certainly touched its peak in July.
oil and palm kernel growth cycles.
What is the role of palm oil stocks?What is the role of palm oil stocks?
prices used to be fairly easily explained in terms of changes in Malaysian stock levels.
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Jan-01 Jan-02 Jan-03 Jan-04Price Change
prices used to be fairly easily explained in terms of changes in Malaysian stock levels.
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Year-on-Year Stock Change, '000 tonnes
Stock Change
to move together. Prices are still growing yearyear despite the big increase in Malaysian stocks.
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Jan-01 Jan-03 Jan-05Price Change Stock Change
to move together. Prices are still growing year-on-year despite the big increase in Malaysian stocks.
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Year-on-Year Stock Change, '000 mt
Stock Change
It is clear that palm oil stocks (we use Malaysian stocks as the reference) no longer drive CPO prices. Instead, our theories must adjust to reflect the band.
Logic suggests that, with a price band, a floor exists to CPO prices when high stocks have driven prices down so far that it becomes profitable to make and use biodiesel without any government subsidy.
However, when stocks are low, food demand for oils should pull CPO far enough above the price floor for food use to compete oil away from biodiesel output.
So, we expect the CPO premium over dieselinversely related to the stock level, i.e., the premium
we must look instead inside the price band
It is clear that palm oil stocks (we use Malaysian stocks as the reference) no longer drive CPO prices. Instead, our theories must adjust to reflect the band.
Logic suggests that, with a price band, a floor exists to CPO prices when high stocks have driven prices down so far that it becomes profitable to make and use biodiesel without any government subsidy.
However, when stocks are low, food demand for oils should pull CPO far enough above the price floor for food use to compete oil away from biodiesel output.
CPO premium over diesel to be inversely related to the stock level, i.e., the premium
we must look instead inside the price band
over diesel. Early in 2011, the premium was too high, but it is now back down near its average
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Jan-07 Jan-08 Jan-09Stocks Premium of CPO over diesel
. Early in 2011, the premium was too high, but it is now back down near its average .
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EU prem
ium over diesel, $/tonne
Premium of CPO over diesel
premium over diesel should rise a little, but not back to the peaks of early this year
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Jan-07 Jan-08 Jan-09Stocks Premium of CPO over diesel
premium over diesel should rise a little, but not back to the peaks of early this year.
Jan-10 Jan-11-200
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EU Prem
ium over diesel, $/tonne
Premium of CPO over diesel
and soy oil in vital markets such as India keeps soy oil prices from moving too far above CPO.
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Q4 2003 Q4 2004 Q4 2005 Q4 2006 Q4 2007Duty-paid CPO Import Price as % of SBO
and soy oil in vital markets such as India keeps soy oil prices from moving too far above CPO.
Q4 2007 Q4 2008 Q4 2009 Q4 201040%
50%
60%
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90% Palm O
il % of (Palm
+ Soy Oil) Im
ports
Duty-paid CPO Import Price as % of SBO CPO % of SBO+CPO Imports
normal, the soy oil premium, which is already high, is not expected to rise much further.
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Jan-07 Jan-08 Jan-09
CPO SBO CPO Average
normal, the soy oil premium, which is already high, is not expected to rise much further.
Jan-10 Jan-11
CPO Average SBO Average
The picture I have described is quite different from that you may have expected.
We are now in a “new world” in which vegetable oils trade in price band, created by biofuels, which links vegetable oils inextricably to the petroleum price.
The old fashioned drivers of oils prices, i.e., supplydemand and stocks, are still a factor in setting prices, but the supply-demand balance only influences prices within limits that are set by petroleum.
Therefore, I will end with a few remarks about the outlook for the petroleum market.
We have to analyse the petroleum market as well as supply-demand in vegetable oils.
The picture I have described is quite different from that you may have expected.
We are now in a “new world” in which vegetable oils trade in price band, created by biofuels, which links vegetable oils inextricably to the petroleum price.
The old fashioned drivers of oils prices, i.e., supply-demand and stocks, are still a factor in setting prices,
demand balance only influences prices within limits that are set by petroleum.
Therefore, I will end with a few remarks about the outlook for the petroleum market.
We have to analyse the petroleum market as demand in vegetable oils.
What is the petroleum market doing?What is the petroleum market doing?
encouraging lots of drilling. This should boost output, especially when Libyan supplies return.
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1,500
2,000
2,500
2005 Q3.2006 Q2.2007 Q1.2008 Q4.2008Number of Oil Rigs
encouraging lots of drilling. This should boost output, especially when Libyan supplies return.
Q4.2008 Q3.2009 Q2.2010 Q1.20110
25
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100
125
Brent Crude North Sea O
il, $/barrel
Number of Oil Rigs Brent Crude
still by far the biggest consumer, has stabilised, but high prices have pushed it below its peak.
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1992 1994 1996 1998 2000 2002Brent Crude Moving Average of US Demand, mn bbl/day
still by far the biggest consumer, has stabilised, but high prices have pushed it below its peak.
2002 2004 2006 2008 201015
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Dem
and, million barrels/day
Moving Average of US Demand, mn bbl/day
its demand; yet, prices were much lower in the past, when stocks were also much lower.
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1991 1993 1995 1997 1999 2001 2003
Brent Crude Moving Average US Stocks in Days of Demand
its demand; yet, prices were much lower in the past, when stocks were also much lower.
2003 2005 2007 2009 201170
75
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85
90
95
100
US Stocks in
Days of D
emand
Moving Average US Stocks in Days of Demand
“The cure for high prices is high prices”.
This is as true for petroleum as it is for other markets.
High crude oil prices are stimulating new discoveries and output, including from deep offshore fields and from unconventional sources such as tar sands.
High crude oil prices are also hitting demand, both as users save energy and turn to cheaper alternatives, led by natural gas, but also by making a double dip recession much more likely.
This is why I believe the petroleum prices must fall, and this will have a direct and negative impact on all
should remain at current high levels
“The cure for high prices is high prices”.
This is as true for petroleum as it is for other markets.
High crude oil prices are stimulating new discoveries and output, including from deep offshore fields and from unconventional sources such as tar sands.
High crude oil prices are also hitting demand, both as users save energy and turn to cheaper alternatives, led by natural gas, but also by making a double dip recession much more likely.
This is why I believe the petroleum prices must fall, and this will have a direct and negative impact on all
should remain at current high levels
• 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
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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© LMC International, 2011All rights reserved
This presentation and its contents are to be held confidential by the client, and are not to be disclosed, in whole or in
part, in any manner, to a third party without the prior written consent of LMC International.
While LMC has endeavoured to ensure the accuracy of the data, estimates and forecasts contained in this presentation,
any decisions based on them (including those involving investment and planning) are at the client’s own risk.
LMC International can accept no liability regarding information analysis and forecasts contained in this presentation.
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© LMC International, 2011All rights reserved
This presentation and its contents are to be held confidential by the client, and are not to be disclosed, in whole or in
part, in any manner, to a third party without the prior written consent of LMC International.
While LMC has endeavoured to ensure the accuracy of the data, estimates and forecasts contained in this presentation,
any decisions based on them (including those involving investment and planning) are at the client’s own risk.
LMC International can accept no liability regarding information analysis and forecasts contained in this presentation.
