MARKET NEWS SERVICE MNS PALM PRODUCTS GLOBAL MARKETS AND DEVELOPMENTS

Transcription

1 MARKET NEWS SERVICE MNS PALM PRODUCTS GLOBAL MARKETS AND DEVELOPMENTS

2 Crude palm and palm kernel oils Ayoola Pure Palm Oil Nigeria Fresh palm fruit bunch Hornbill Foods USA Palm kernel cake, ACE (Singapore) Pte Ltd African crude red palm oil Palm wine The designations employed and the presentation of material in this report do not imply the expression of any opinion whatsoever on the part of the International Trade Centre concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. This document has not formally been edited by the International Trade Centre August

3 TABLE OF CONTENT Acronyms and abbreviations... 6 Background, objectives, targeted audience, coverage and content of the study. 7 PART ONE: GLOBAL ISSUES Palm products and general considerations on palm sector Palm products General considerations on palm oil position in the vegetable oils complex Factors affecting market fundamentals Supply Issues Demand and consumption Trade Participants in trade Government trade control Tariff-based instruments Non-tariff trade control measures Trade defence mechanisms Technical barriers to trade - TBT Trade development instruments International and national trade policy instruments Cross-border trade issues Price issues Correlation between prices of vegetable oils Correlation between crude petroleum and vegetable oils prices Physical and futures trading Physical (cash) trading Futures trading Contracts Physical (cash) contracts Shipping contracts Futures contracts. 48 PART TWO: PALM OIL Cultivation and harvesting Varieties Soil and climatic requirements Harvesting Commercially cultivated areas Yields Costing Fresh Fruit Bunches Sustainability of oil palm cultivation

4 2. Processing Crude palm oil and palm kernels extraction Recycling and waste management in crude palm oil production Milling and crude palm oil production costs Refining and fractionation Refining Fractionation Waste management in palm oil refining PART THREE: RECENT MARKET DEVELOPMENTS Supply outlook - palm oil, kernels and palm kernel oil Demand outlook.76 3 International trade Exports Imports Price outlook.83. PART FOUR: BIOFUELS AND PALM OIL - BASED BIODIESEL 84 1 Definition and key issues 84 2 Current market situation Biofuel policies Production and consumption Trade Pricing Major concerns Sustainability certification developments Key stakeholders involved in the development of sustainability certification schemes Conclusions and implications for developing countries 94 LINKS 95 TABLES Table 1 Eleven largest oil palm plantation companies, Table 2 FFB production cost estimate - Malaysian mature plantation, Table 3 Malaysian average FFB and palm oil yields, Table 4 Current and potential utilisation of oil palm plantation and palm oil mill by-products and wastes.. 65 Table 5 Estimation of Malaysian average milling cost, Table 6 Comparison of crude palm oil production costs in selected countries, Table 7 ECOWAS production of palm oil, palm kernels and palm kernel oil 2010/ Table 8 ECOWAS region - Exports, imports and trade balances of palm oil, palm kernels and palm kernel oil 2010/

5 Table 9 Table 10 EU imports of biodiesel by type of feed stock and corresponding tariffs ad valorem, 2008 to USA imports of biodiesel by type of feed stock and corresponding tariffs ad valorem, 2006 to CHARTS Chart 1 World production of vegetable oils 11 Chart 2: Share of palm oil in 2010/11 global output of vegetable oils 12 Chart 3: Consumption of vegetable oils for food, non-food and biofuel uses.16 Chart 4: Price correlation palm, palm kernel, coconut and soybean oils 36 Chart 5 Correlation palm, soybean and crude petroleum oils.36 Chart 6 Correlation palm kernel, coconut and crude petroleum oils 37 Chart 7 Evolution palm oil versus crude petroleum prices 38 Chart 8 Palm oil physical and futures prices. 40 Chart 9 Palm kernel oil physical and futures prices.. 40 Chart 10 Oil palm commercial mature areas..52 Chart 11 Commercial mature oil palm plantations in Chart 12 Commercial mature oil palm plantations in Chart 13 Palm oil yields 54 Chart 14 Malaysia- mature area, yields and PO production Chart 15 Malaysia - mature area, yields and PO production Chart 16 Indonesia - mature area, yields and PO production Chart 17 Thailand - mature area, yields and PO production Chart 18 Nigeria - mature area, yields and PO production Chart 19 Côte d Ivoire - mature area, yields and PO production Chart 20 Palm oil - world production 74 Chart 21 Palm kernel oil world production.. 75 Chart 22 Palm oil - global supply and demand balances.. 77 Chart 23 Leading users of palm oil in Chart 24 Palm kernel oil - global supply and demand balance Chart 25 Leading users of palm kernel oil in Chart 26 World exports of palm oil 80 Chart 27 Main exporters of palm oil in Chart 28 World exports of palm kernel oil.. 81 Chart 29 World imports of palm oil.. 81 Chart 30 Leading importers of palm oil in Chart 31 World imports of palm kernel oil 82 Chart 32 Main palm kernel oil importers in Chart 33 Main palm kernel oil importers Chart 34 Annual price indexes for palm products. 83 Chart 35 Prices of palm oils.. 83 Chart 36 World production of biodiesel by types of feedstock 86 Chart 37 Producers of palm biodiesel. 87 Chart 38 Major producers of palm biodiesel in Chart 39 Major producers of palm biodiesel in Chart 40 Monthly biodiesel production viability 91 FIGURES Fig. 1 Palm oil industry succinct view. 9 Fig. 2 Primary, secondary and further processing of palm oil; products utilisation.. 62 Fig. 3 Production of crude palm oil - unit operations, conventional process. 63 Fig. 4 Recycling and use of by products and waste from oil palm plantations and crude palm oil mills. 66 4

6 Fig. 5 Refining and fractionation of crude palm and palm kernel oils. 70 Fig. 6 Physical and chemical refining of palm oil. 71 ANNEXES Annex I Explicative glossary 102 Annex II Financial involvment of foreign groups and corporations in palm sectors in Nigeria, Liberia and Côte d'ivoire Annex III Policies adopted in in selected countries major producers, exporters and importers of palm products 109 Annex IV Palm products: customs tariffs and taxes Annex V Agreements in force in Côte d'ivoire, Nigeria, Senegal and Ghana Annex VI FOB and CIF contract terms

7 ACRONYMS AND ABBREVIATIONS AIFO-UEMOA AIPH BMD CET CIDA COMESA CPO ECOWAS EU FAO FDA FOSFA GAPKI Ha IFC ITC MEOMA MM MNS MPOA MPOB MPOC n.a. NGO NIOP RM RBD RPO RSPO PNG UEMOA USDA Association des Industriels de la Filière Oléagineuse de l Union Economique et Monétaire Ouest Africaine Association Interprofessionnelle de la filière Palmier à huile en Côte d Ivoire Bursa Malaysia Derivatives Common External Tariff Canadian International Development Agency (The) Common Market for Eastern and Southern Africa Crude Palm Oil (The) Economic Community of West African States European Union Food and Agriculture Organisation of the United Nations Food and Drug Administration of USA (The) Federation of Oils, Seeds and Fats Associations Gabungan Pengusaha Kelapa Sawit Indonesia Hectare International Finance Corporation International Trade Centre Malaysian Edible Oil Manufacturers Association Million Market News Service Malaysian Palm Oil Association Malaysian Palm Oil Board Malaysian Palm Oil Council Non available Non-Governmental Organisation National Institute of Oilseed Products Malaysian ringgit Refined, Bleached, Deodorised palm oil Refined Palm Oil Roundtable on Sustainable Palm Oil Papua New Guinea West African Economic and Monetary Union US Department of Agriculture 6

8 BACKGROUND, OBJECTIVES, TARGETED AUDIENCE, COVERAGE AND CONTENT OF THE STUDY Background The continuous growth of the international demand for, and trade in oil seeds, oils, fats and oil meals has exceedingly increased business opportunities for producers and exporters of palm products in developing countries in general, and for several ECOWAS member countries in particular. However, these opportunities remain only partly exploited due to investment and trade development constraints, the insufficient knowledge of palm products and the inadequate information made available to palm sector stakeholders on markets, products and business opportunities. The International Trade Centre (ITC) is implementing, in close collaboration with the regional economic communities ECOWAS 1, ECCAS, COMESA the trade-related technical assistance Programme for building African Capacity for Trade - PACT II, funded by the Canadian International Development Agency (CIDA). The programme aims at reinforcing the capacity of African regional and national institutions to enhance export supply and competitiveness, market linkages and export revenues of African enterprises, with a special focus on small and medium size and women-owned firms. One of the expected outcomes of the programme is the strengthening of trade support networks in the regional economic communities. The setup of a trade information system in the ECOWAS region and the strengthening of the information service of the ECOWAS Trade and Enterprise Experts Network (ECOWAS TEN) are key deliverables of this outcome. The trade information system will serve the business community needs for promotion, facilitation and increase of regional and international trade in selected commodities, supporting business information exchanges at national and regional level, facilitating linkages and building up exporters knowledge about markets. The commodities selected for the initial phase of the programme are palm products, mango and cashew. In this framework, the Market News Service (MNS) programme of ITC Trade Information Services section is collaborating with the ECOWAS TEN Secretariat in the setting up of a regionally focused Market News Service in the ECOWAS region. The MNS programme supports in particular the customisation, publication and dissemination of product studies and market bulletins on the selected commodities. This study on global issues and market developments for palm products is the first one in a series. Objectives The present study is aiming to contribute to the development of palm industries in ECOWAS member countries by providing producers, processors and exporters of palm products with global technical and market information, improving their knowledge on selected aspects of processing and trade. The study could thus contribute to bestowing the improvement of profitability and competitiveness of West African exports of palm products and the increase of trade operations performance, hereby boosting the regional and international trade, increasing national foreign exchange earnings and ultimately contributing to regional food security and the decline of poverty level in the palm sector. 1 Member countries: Benin, Burkina Faso, Cape Verde, Côte d'ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo. 7

9 The study is conceived as a basic tool for training events on palm products and markets, recommended to be organised for the benefit of palm business communities By providing the basic understanding of factors influencing the palm sector development, which is necessary for the elaboration of palm sector development strategies, the study is intended to facilitate the process and thereby contribute to the sustainable development of palm production and processing. ECOWAS Commission, through its EXPECT Advisory Committee, is already ensuring its inputs in priority discussions with the Export Actors Platform on palm oil value chain development and are in the process of setting up strategic business partnerships with leading palm oil players such as the SIFCA Group. Meanwhile, a new global strategy that could raise the African competitiveness in palm oil production is being developed by experts from the World Bank Group and the International Finance Corporation (IFC). The strategy, awaited for the end 2011, is expected to result in financing a multi-million dollar oil palm development programme for policymakers and governments, focusing on access to land-use policies, technology transfer, financing, pricing mechanisms, marketing, certification, as well as infrastructure development from the farm to the port. Target audience The study is written for a specific target audience comprising of producers, processors and exporters of palm oil products, in particular SMEs, as well as government bodies and ECOWAS Commission departments in charge of the elaboration of palm sector strategies and development programmes and product sector associations. Product description and content of the study The study covers the following palm products, described according to their Harmonized System classification codes: HS codes Product description Palm nuts and kernels, whether or not broken 1511 Palm oil & its fractions Palm oil, crude Palm oil, other than crude, & fractions thereof, whether/not refined but not chemically modified Palm kernel or babassu oil, crude Palm kernel/babassu oil, other than crude, & fractions thereof, whether/not refined but not chemically modified Source: United Nations Commodity Trade Statistics Database- Comtrade Topics developed include the factors influencing markets of palm products and the market access; the correlation between crude palm oil prices, petrol, and vegetable oil substitutes; the status and importance of sustainability of oil palm cultivation and processing; as well as the market situation of palm products and its relation with palm biodiesel developments. Governmental policies, which are of critical importance for the palm sector development, and are generally insufficiently known and comprehended by farmers and SME processors, are also considered in the study. These topics may constitute the subjects of highly recommended series of national and regional workshops on palm oil development. 8

10 PART ONE: GLOBAL ISSUES 1. Palm products and general considerations on palm sector 1.1 Palm products Oil palms are at the base of the complex palm oil industry. The multiple outputs of their processing are summarised in Figure 1. Three main products and numerous derived ones are obtained by extraction and processing palm fruit bunches. From the fleshy portion of the oil palm fruit is extracted the crude palm oil, together with its primary derivatives - neutralised 2, bleached 3, deodorised 4, and refined/bleached/deodorised RBD 5 palm oils; crude palm stearin and olein. From the seed 2 Neutralised (refined) palm oil (palm olein and stearin) results from the neutralisation process and has a free fatty acids (FFA) content (i.e. acidity) expressed as palmitic acid not exceeding 0.3% 3 Bleached palm oil (olein and stearin) has undergone bleaching up to its colour does not exceed 20 Red measured with the Lovibond tintometer with a 5.5 cell 4 Deodorised palm oil (olein and stearin) result from the deodorisation processs 5 RBD palm oil (olein and stearin) has undergone all these three processes, until the FFA not exceed 0.1% expressed as palmitic acid; its colour measured with the Lovibond tintometer with a 5.5 cell does not exceed 3 Redand the product is odourless and has a neutral taste. 9

11 (kernel) of the palm fruit is extracted the palm kernel oil, further primary processed to refined palm kernel oil and palm fatty acids, alcohols, esters and glycerine derivatives. The two oils have very different fatty acid compositions 6 (see glossary for the explanation of the terms). Palm kernel oil meal is the by-product of palm kernels crushing, used as animal feed ingredient. Empty bunches remaining after the removal of oil palm fruits, as well as palm kernel shells and fibre remaining after the crude palm kernel oil extraction, are used as fertilisers and as fuel. A sap tapped from the palm flower is processed into palm wine 7 and is also a source of yeast. The tree itself can be split and used as supporting frames in buildings. Leaf fibres and empty fruit bunches are used to produce chipboard and plywood. After clearing out plantations, trunks of old palms provide furniture wood. The bark of the palm frond is peeled and woven into baskets. The leaves of oil palm are used for making brooms, roofing and thatching, baskets and mats, while the thicker leaf stalks are reinforcing the walls of village huts. Palm oils have a multitude of food utilisations, often in competition with other vegetable oil substitutes. The crude palm oil is one of the main and richest sources of carotene (which confer the bright red colour to the oil). Its other valuable constituents are vitamin E fractions 8 which act as antioxidants and can reduce cell damage caused by toxic substances and environmental pollution. In addition, the oil is an excellent source of powerful anticarcinogenic 9 and anti-thrombosis substances. Crude, bleached and refined palm oils are widely used as cooking and salad oils, in competition with substitutable soybean, sunflower and other polyunsaturated vegetable oils. Palm oil is considered one of the best frying oils because of its great stability at high temperatures (it does not produce unpleasant smells) and its lower cost in comparison with other vegetable oils. Because of its plasticity and its emulsifying properties, the bleached, refined and fractionated palm oil is used in competition with hydrogenated soybean, cotton, groundnut, maize or coconut oils in the manufacture of shortenings, margarines, confectionery products, ice creams, milk and cocoa butter substitutes. Palm and palm kernel oils are also feed stocks for the manufacture of oleo chemicals including fatty acids, fatty esters and fatty alcohols. Derived non-edible uses of palm oil include the manufacture of soaps and detergents, candles, cosmetics, lubricants, greases, drilling mud for the petroleum industry, plasticizers, glues, printing inks, etc. Palm oil-based environmentally friendly biodiesel fuel is increasingly used and economically more advantageous than other oilseed-based biofuels. Palm kernel oil and coconut oils are the two lauric oils of commercial importance. They are interchangeable in many applications because of their similarities in properties. However, palm kernel oil contains a higher amount of oleic acid than coconut oil, making it more suitable oil for hydrogenation (hardening) and the production of edible speciality fats with different melting points, hardness and end-uses. These fats are used in the production of 6 Palm oil contains equal amounts of saturated and unsaturated fatty acids. The saturated fatty acid portion consists of palmitic acid (44%) and stearic acid (5%). The unsaturated part consists of about 40% monounsaturated oleic acid and 10% polyunsaturated linoleic acid, which is also an essential fatty acid (see glossary). Conversely, palm kernel oil is over 80% saturated (48% lauric acid, 16% miristic acid, 8% palmitic acid and 10% others. Only 18% of its composition is unsaturated: 15% mono unsaturated oleic acid and 3% poly unsaturated linoleic acid. Its composition resembles that of coconut oil, the two oils being interchangeable in many uses. 7 The palm wine can be fermented and distilled into a gin known as Akpetesin in Ghana and Ogogoro in Nigeria 8 tocopherols and tocotrienol 9 tocotrienols 10

12 coffee and cocoa butter substitutes, toffees, coffee whiteners, whipped toppings, filler creams and other non-dairy products. The relatively high content of myristic and lauric fatty acids of the palm kernel oil makes it very suitable for the manufacture of soaps, washing powders and personal care products. Other non-edible applications of the oil include candles manufacture, as well as the pharmaceutical and perfume industries. Crude and primary processed palm and palm kernel oils have already a multitude of applications when utilised as such; the range of applications can be however extended by modifying their properties by secondary processing (refining). Palm kernel cake is used as a medium grade protein feed, containing about 15% crude proteins and up to 12% oil, depending on the extraction method 10. Although the cake provides both protein and energy, it is looked upon more as a source of medium grade protein with high fibre content, more suitable for feeding ruminants. Supplemented with minerals and vitamins, the cake can be the sole ingredient in dairy cattle ration, or can be mixed with other feedstuffs. More information on palm oil processing and uses are given in the second part of the study in chapter 2 (processing). 1.2 General considerations on palm oil position in the vegetable oils complex Vegetable oils are a group of staple 11 food of capital economic and social importance to all countries. According to USDA, the world output of the five major 12 vegetable oils over the ten past seasons increased by about 6 per cent per year, from 90.2 million tons in 2000/01 to million tons in 2010/11 (See Chart 1 and the definition of split years in the explicative glossary in Annex I) Chart 1: World production of vegetable oils, million tons PO SBO SFO PKO RSO Other 10 The expeller-pressed palm kernel cake contains 5 to 12% oil and the solvent extracted one only 0.5 to 3%. 11 Staple food is that regularly consumed in a community/country as source of most, or a significant proportion, of their calorie requirements. 12 The major vegetable oils include oils of palm (PO), soybean (SBO), sunflower (SFO), palm kernel (PKO) and rapeseed (RSO), which covered about eighty eight per cent of the world production of vegetable oils in 2010/11. Others include cottonseed, coconut, groundnut, olive, mustard and castor oils. 11

13 Global production of palm oil increased at a higher rate than the world output of the five major vegetable oils, i.e. by 9.5 per cent per year, rising from 24.3 million tons in 2000/2001 to nearly 48 million tons in 2010/11. Since 2006/07 onwards, the palm oil overtook in importance the soybean oil, becoming the most produced vegetable oil worldwide. In 2010/11, the palm oil amounted to a third of the world output of major vegetable oils, followed closely by soybean oil (Chart 2). Chart 2: Share of palm oil in 2010/11 global output of vegetable oils (147.3 million tons) PKO 4% RSO 16% SFO 8% Other 11% SBO 28% PO 33% Although the palm oil markets are facing major challenges, palm industry is a highly profitable and evolved into a global agro-industry. The dominant position of palm oil in the global supplies of vegetable oils is due to its competitive position in comparison with the other of oils: the oil palm yield per hectare is 5 to 10 times higher than other oil bearing crops and its cultivation has the lowest requirements of fuel, fertilisers and pesticides. The specificity of oil palm is that through processing its fruits yields three very distinct primary palm products: palm oil, palm kernel oil and palm kernel meal. The supply of palm products is determined by the demand for palm oil for edible and biodiesel uses, and influenced only to a limited extent by the demand for lauric oils 13 (palm kernel) or for animal feed (palm cake). In addition, oil palm is an investment crop. The stability of supply of this perennial tree crop is higher than that of annual oilseed crops such as soybean or rapeseed. However, oil palm production can hardly be adjusted to short term variations in world demand and prices of vegetable oils, unlike the annual oilseed crops. Palm oil is of particular importance to West Africa. According to FAO, the oil is currently providing 8 per cent on the average of the daily energy intake 14 of the population. West African development potential of oil palm plantations and processing industries attracts the keen interest of investors, multinationals, commodity traders and business developers. Some examples of the growing interest and considerable financial involvement of foreign groups and corporations in the palm sectors in Nigeria, Liberia and Côte d Ivoire are summarised Annex II. The ECOWAS region is a net importer of palm oil, although many of the member countries cultivate oil palms and have the potential to increase their production of palm oil in order to meet both the domestic and the regional demand, in particular the needs of ECOWAS member countries with vulnerable economies and high rates of hunger. The ECOWAS deficit for edible oils which has to be covered by imports is estimated to reach nowadays to 13 Laurics are vegetable oils containing 48 % to 57% of saturated lauric fatty acid, occurring especially in coconut oil and palm-kernel oil kcal/capita/day 12

14 tons per year and is foreseen to increase to some 1.5 million tons by The cost of imports of palm oil or its substitutes, such as soybean or sunflower oils - generally supplied by countries where production and exports are subsidised, exert a very strong pressure on foreign exchange balances of ECOWAS member countries. Meanwhile, the availability of relatively low-cost imported oils diminishes the competitiveness and development prospects of domestic oils and fats industries. However, recent development strategies and substantial investments into oil palm cultivation in the region should result in a large increase of palm oil supply in the medium term. The major characteristics of the vegetable oils markets, palm oil included, are the overwhelming weight of governmental policies on the sector development; the volatility of prices and the impact of speculation; and the correlations between the consumption and prices of several oils due to their substitutability for major uses. Governmental policies 15, strategies and legal and regulatory frameworks are governing the development of the vegetable oils sectors worldwide, and palm oil makes no exception. Governmental policies and interventions in production, marketing and international trade in palm products are elaborated and continuously reappraised and adjusted under the influence of specific domestic and international market developments, with a view to achieving stability and balanced growth of the sector, as well as the satisfaction of consumers needs. Various policy instruments are available and globally applied, although their intended purposes most often induce unintended side effects and create strong distortions within the domestic and international vegetable oils markets in general, and in palm oil markets in particular. Market distortions are induced not only by policies addressing straightforwardly oil palm cultivation, processing, consumption, trade and prices, but also by policies affecting the economy of palm oil substitutes, i.e. soybean, rapeseed and sunflower oils. Commonly, policies of palm exporting countries tend to support domestic producers and exporters, while importing countries tend to apply measures leading to border protection, in an effort to shield domestic industries from international competition and high consumer prices. In Annex III are summarised the selected policy measures applied from 2009 to 2011 by governments of major countries producing and trading in palm oil products; these reflect their forceful impact on the markets. The selected countries monitored are the major producers, importers and exporters of palm products, covering over 90% of the world supply. Given the overwhelming importance of government implications in palm oil markets and the wide range of measures employed, these are further considered in sub chapter Factors affecting market fundamentals 2.1 Supply Issues Given the economic benefits of the palm oil sector, governments support its development and are generally supportive of the smallholding farmers and processors. Poor coordination between central and regional administrations, the lean public financing resources and important problems and disputes in regard to land allocation are however leading very often to uncertain investment climates. Cultivation of oil palms is challenged by the decline in cropland availability due to human activities and the resulting competition for land use with cereals and other crops, especially in the two leading producing and exporting countries 16, Malaysia and Indonesia. West African 15 The oilseeds desk of the Trade and Markets Division of FAO monitors policy measures and issue Monthly Price and Policy Update MPPU reviews that can be downloaded at 16 Together they cover over 85% of world supplies of palm oil and derived products. 13

15 arable land resources have shrunk and degraded at a greater than the world average; this is mainly due to desertification, overgrazing, expanding agricultural activities and urbanization 17. In nearly all ECOWAS countries where oil palm is cultivated, the legitimacy and security of land holdings are critical issues for large estates and smallholders alike. Small and medium scale landowners are often reluctant to invest in joint ventures by handing over land, which they see as a right of inheritance. Holders of customary land rights in several countries are challenging the lack of recognition of their rights in the allocation of land for oil palm plantations and the unfair practices in allocating plots to smallholders. Inadequate land policies, disagreements and uncertainty over land tenure, and security are the causes of the most persistent and tenacious conflicts preventing increased cultivation of oil palms. Strong public policies for settling land disputes and developing share-based, flexible and affordable land management systems are critically needed in order to solve long-standing conflicts over land for oil palm cultivation in the region. Land development policies, including restrictions on land use aiming at controlling oil palm supplies, are often used together with price support schemes and input subsidies. In Indonesia, oil palm cultivation and replanting incentives are being granted in the form of preferential loans and land concessions for new, sustainably managed plantations. In an attempt to control national palm oil output during periods of oversupply and excess stocks, Malaysian government uses land management measures to slow down the expansion of oil palm cultivation, offering meanwhile incentives for using palm-based biodiesel and increase the domestic consumption of palm oil. The continuing concentration of palm oil production in Malaysia and Indonesia raised concerns regarding environmental sustainability of oil palm cultivation. The scarcity of land available in both countries and the need to maintain their leadership position on palm oil export markets has led the governments of the two countries to extend oil palm cultivation in environmentally sensitive areas. However, production of palm oil is being increased mainly through replanting existing estates with high-yielding varieties, rather than through the setup of new plantations. Practically all countries producing oilseeds, fats and oils apply production support and trade control measures. Policies supporting production of oilseeds and vegetable oils which are direct substitutes of palm oil 18 (namely soybeans, rapeseed and sunflower) and their international trade are directly influencing the position of palm oil in the international market. By distorting palm oil competitiveness versus annual oilseeds and vegetable oils, they allow major exporters of soybeans and rapeseed oils, such as United States, the European Union, Canada or Argentina, to maintain/gain shares in the global vegetable oils market. 17 See 18 For example, the United States curtailed the former system of target prices, deficiency payments and area set-aside requirements for soybeans, rapeseed and sunflower and replaced it with income stabilisation measures since the past ten years. Income support is extended in the form of fixed producer payments decreasing over time, which are not dependent on production levels; planting decisions are now determined by market conditions. In Mexico, soybeans and rapeseed continue to benefit from PROCAMPO decoupled payments; target incomes were raised in 2009 by 30 per cent for rapeseed and 40 per cent for soybeans and will remain valid until Canada, the largest single rapeseed producer, set since 2008 a policy supporting a better response to changing market conditions, enhancing risk management and reducing the government s regulatory role in the rapeseed sector. Support includes measures to help covering farm income declines and promotion of production insurance. Revenue insurance programmes were also strengthened in the United States. Subsidized palm crop insurance schemes are being reinforced in Brazil, Mexico, and India since

16 Countries supplying vegetable oils, including palm oil, are following the long term tendency to gradually substitute direct production support schemes with indirect policy measures intended to stabilize incomes and make production more responsive to market signals. Indirect production support schemes are applied in Thailand for example, through the intensification of incentives extended for oil palm cultivation and palm oil production in an effort to meet the rising domestic demand for edible palm oil and biodiesel. In addition to providing low interest loans to oil palm farmers and palm oil producers and supporting the production and use of high-yielding seedlings, the government is imposing minimum purchase prices at which crushers have to buy oil palm fruit branches from farmers; provision are also made for public purchases of the oil at subsidized prices. In other countries such as Colombia, India, Indonesia, Kenya, Malaysia and Venezuela, producers are granted tax exemptions and/or receive subsidised seasonal credits and loans for various on-farm investments (purchase of fertilisers, provision of adequate storage facilities, etc.). Countries India, Colombia, the Philippines and Thailand are also supporting the development and use of high yielding oil palm seed and the improvement of cultural practices, with a view to increase domestic palm oil self-sufficiency and reduce their dependence on imported vegetable oils. In developing countries comprising ECOWAS member states the public financial resources for a steady expansion of oil palm cultivation are insufficient. Therefore, national foreign investment policies are encouraging and greatly facilitating foreign investment in palm plantations and upstream industries; these developments contribute finally to poverty alleviation and the strengthening of the national industrial tissue, in addition to expanding palm oil export availabilities. Having to face increasing difficulties to match the domestic demand of edible oils in general, and of palm oil in particular, as well as the high volatility of palm oil prices - which constitute a potential threats to national food supplies and security, governments of ECOWAS countries with a potential to develop palm industries elaborated and reinforced development strategies and plans promoting a sustained growth of the sector. These strategies are generally underpinned by production support measures, rather than by price or income support measures, particularly in countries constrained by resource limitations. Incentives to increase domestic production remain however extremely vulnerable to low priced imports of palm oil from Asian countries, wherefrom the need to couple production support with import control measures - mainly taxes. Prominent multinational companies involved in palm industries, as well as banks and commodity traders, are granted concessions for oil palm estates and the production and marketing of palm oil. Very large palm conglomerates and multinationals are driven in the ECOWAS region by the opportunity to redevelop neglected West African plantations and establish new ones. Recent investments in oil palm cultivation and processing were estimated at 6 billion US$. Aid to developing countries schemes are extended to palm oil development; one of the numerous examples is the support provided by Australia for the cultivation of oil palm and the production of palm oil in Papua New Guinea. Financial and technical support to oil palm developments in Africa are also extended by international organisations including the World Bank and the International Finance Corporation, FAO and UNIDO. 15

17 2.2 Demand and consumption 19 According to USDA, in 2000/01 about 94 per cent of the world output of vegetable oils was used as food; non-food uses amounted to only 6 per cent. The development of oleo chemical industries and of biofuel markets changed drastically the structure of consumption ten years after. In 2010/11, 72 per cent of the world production of vegetable oils was used in the food sector, while non-food and biofuel uses took in respectively 18 per cent and 15 per cent of the output. 200 Chart 3: Consumption of vegetable oils for food, non-food and biofuel uses, million tons Food Non-food Biofuels The fast increasing demand for palm oil for edible, non-edible and biodiesel uses is driven by population increase, economic growth and limited petroleum resources. World population attained 7 billion in 2010 and is expected to increase by 29% and exceed 9 billion by According to PricewaterhouseCoopers estimation, the ECOWAS region accounts already for about 4.5% of the world s population, having reached 306 million people in Considering an annual average demographic increase in ECOWAS region of 2.7% per year, by 2040 its population could attain some 612 million. Palm oil availability must be ensured for at least meeting the fast growing demand fuelled by this rate of population increase. The current average consumption of fats and oils in the ECOWAS region averages, according to FAO and Oil World statistics, 40 g/head/day, equivalent to some 4.47 million tons per year, of which at least a half consists of palm oil. It is important noting that the region is a net importer of palm oil; the combined imports of the fifteen ECOWAS member countries rose from 65 million US dollars in 2001 to over 550 million in Imports will continue in the medium term in order to satisfy consumption requirements, even if the regional production of palm oil rises according to expectations. At low income levels, demand for edible fats and oils, including palm oil, is highly elastic; small rises or falls in income bring about large rises or falls in consumption. At higher income 19 Demand is an economic principle that describes a consumer s desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa. Consumption is the amount of a specific good or service used in a particular time period. In the case of oils and fats, consumption is calculated as: opening stocks plus production and imports minus exports and ending stocks. Very often the two notions are confounded. 16

18 levels, the income elasticity of demand decreases, i.e. demand is less responsive to changes in income until, at a certain level, response ceases and the market reaches saturation. Developing countries have lower incomes per capita and higher income elasticity of demand for edible oils and fats. As incomes in these countries are expected to continue growing faster than in developed countries, consumption should also grow faster. By contrast, the per capita consumption of edible oils and fats will remain sluggish in many industrialised countries where incomes are high and population is not expected to attain significant rates of growth. In these countries, the main dynamic factor determining the growth of palm oil consumption will remain the demand for biodiesel and oleo chemicals. Demand for palm and palm kernel oils is also a function of their price compared to prices of oils and fats substitutes for specific end uses, such as soybean, rapeseed, sunflower, cotton or coconut oils in food and biodiesel applications. Abundant supplies of substitute crops and oils depress demand and prices of palm products. Consumers taste preferences, dietary habits and knowledge of properties and mode of use of palm oil determine its choice between the other edible oils alternatives. The taste and odour of unrefined red palm oil 20 is being thought after in Africa, where it is traditionally used in cooking. Western consumers prefer the refined, uncoloured and deodorized palm oil and use it extensively for deep frying. Asian consumers use it for all edible purposes. Price competitiveness of different types of edible oils (palm, soybean, sunflower, rapeseed, sesame, cotton, etc.) weighs heavily in determining the choice. The negative campaigns aiming at discontinuing the food use of palm oil and replacing it with other vegetable oils on health grounds had adverse effects and hindered temporarily the raise in palm oil consumption. The bottom line of these campaigns stirred initially by the American Soybean Association was the replacement of edible palm oil by soy bean oil, but their impact faded away following results of scientific research 21 and accurate public information campaigns financed mainly by the major palm oil producing countries. Other public campaigns initiated by NGOs and environmental activist groups at the beginning of this decade stated the possibility of irreversible harmful environmental effects of palm oil cultivation and processing because of the deforestation of tropical rain forests; the destruction of natural habitat of critically endangered species (such as the orang-utans and tigers); inappropriate land use and human-rights violations (from low pay and poor working conditions, to theft of land); and to the contribution to global increase in greenhouse gas emissions. These campaigns proved potent in raising consumers concern about the sustainability of cultivation and processing of palm oil, jeopardising future raise in demand. 20 Red palm oil gets its name from its characteristic red colour given by its natural content of at least ten types of carotenes (pro-vitamin A). During the conventional refining process, 100% of the natural carotenes are destroyed, while with the new refining technology over 90% of the natural carotenes content may be retained. 21 Changes in dietary intake of fats and oils which occurred over the past century comprised an increasing consumption of saturated and partially hydrogenated trans-fats which can increase the risk of coronary heart disease by raising levels of bad cholesterol and lowering levels of "good" cholesterol - wherefrom the claim that palm oil has harmful effects on public health. Yet, the chemical composition of palm oil is conferring the product a neutral cholesterolaemic effect (induction of elevated levels of cholesterol in blood). The saturated palmitic fatty acid contained for about 50% in the palm oil has been proven to have a neutral cholesterolaemic effect; the hypercholesterolemic effect caused by the less than 1.5% of lauric and myristic saturated fatty acids contained in the oil are compensated by these of the moderate amounts of monounsaturated oleic acid and linoleic fatty acids which are hypocholesterolaemic, as well as by the presence of vitamin E, which are natural inhibitors of cholesterol synthesis. Therefore, the consumption of palm oil as a source of dietary fat does not pose any additional risks for coronary artery disease when consumed in realistic amounts, as part of a healthy diet; this is the case in its wide use in Asia and Africa. 17

19 Voluntary organisations, such as RSPO - The Roundtable on Sustainable Palm Oil were formed since 2004, with the objective to promote the growth and use of sustainable oil palm products through credible global standards and engagement of stakeholders. This issue is specifically considered in the second part of this study under the sub-chapter 1.7. Petroleum price is one of the factors affection palm oil demand and prices; there is a tight correlation between the price of crude petroleum and that of certain vegetable oils. A commodity analyst of LMC International 22 estimated that every rise of 10 dollars per barrel of crude petroleum price may raise prices of the major vegetable oils by 70 dollars per ton. Limited petroleum availability and the rise of its price above certain limits support a larger use of certain soft oils 23 and of palm oil for the manufacture of supplementing biodiesel. Both the United States and the European Union have set ambitious long term targets for the use of biofuels in transport, with a view to decrease their dependence on petrol, as well as for reducing carbon dioxide emissions in transport because they impact on global warming. National policies in support of biofuel consumption include tax credits extended to blenders of palm-based biodiesel. Biofuel mandates create a higher demand for soft oils, leaving a gap in vegetable oils supplies that could be met also by palm oil. When supplies of crude palm oil are abundant and stocks are high, its price falls so far that it becomes profitable to produce and use palm-made biodiesel. However, when the demand for the oil is high, stocks are low and supplies are tight, crude palm oil price will not justify its use as biodiesel. Several types of consumer policies and measures are currently in use and can prove highly effective in at least some situations. Many of them are aiming at raising consumption from domestic sources and/or reduce dependency on imports. Some measures are intended to support directly the consumers, by subsidising domestic palm oil consumer prices in order to reduce the cost of living, or to increase consumption within nutrition policies. Indirect policy measures include the levy of Value Addition Tax (VAT) on the final consumption 24 of all goods, palm and palm kernel oils included. Other policy measures aim at facilitating consumption and improving domestic market availabilities by setting-up food-based safety net programs, improving meanwhile safety and the health of consumers by controlling more strictly the quality of vegetable oils imports, palm oil included. In India, for instance, the government operates an extensive and fiscally expensive set of food-based safety net programs. The largest among these is the Targeted Public Distribution System, which operates through a country-wide distribution network of government stores selling wheat, rice, and sometimes palm oil to households below the poverty line at heavily subsidized prices. Other food-based safety net programs operated in India and several African countries are the food-for-work programs and mid-day school meals. Consumer protection measures can be either directed at companies supplying food palmbased products, which are required to provide certain information on product composition through labelling, or by the imposition of restrictions on some types of sales and advertising practices. The challenge for policy makers is to apply the most adequate policy and consumption control methods for addressing the specific problems they are confronting. In some importing countries and circumstances, the level of the domestic consumption of edible oils, including palm oil, is maintained through price policy measures: retail prices for oils can be either set, or controlled closely by government. In other cases, government 22 Independent economic and business consultancy company for the agribusiness sector, 23 Soybean, sunflower, rapeseed and corn oils 24 Business community in many developing countries claim that VAT is not simply a tax on final consumption, but is very commonly levied in addition to normal VAT and tariffs, at often quite high rates, on imports and sales of the formal sector so as to bear differentially on the informal sector. 18

20 control agencies and public retail outlets are directed to sell the oils procured on the national or international market at prices below the market level. However, in an attempt to limit the distorting effects of such measures, most often they are applied on a temporary basis. For example, Tamil Nadu government is distributing palm oil at subsidised prices. In Bangladesh, the government fixed retail price of palm oil at the demand of importers. More examples of policy measures supporting the consumption of palm products implemented during the period are given in the Table in Annex III. 2.3 Trade A number of factors have a decisive influence on trade in palm and palm kernel oils. These include the uncertainty over supply and export availabilities (volumes and prices depending on weather, pests and disease, natural phenomena, economic and political situation, exchange rates 25, etc.), as well as the adequacy of trade and investment policies, infrastructure conditions and facility of access to information (influencing the reliability and performance of trade operations). Most of the high and middle income economies 26, which encompass the majority of countries exporting and importing palm products, operate in a free market. The private sector plays an important role in marketing and trade 27 in palm products; the extent of its involvement differs, however, from country to country. Multinational corporations dominate the bulk of the international trade Participants in trade Several types of actors intervene in palm trade, starting with the farmers cultivating oil palm and ending with the end-users and consumers of palm products. Each of them has definite functions and responsibilities, and their performance determines the efficiency and profitability of trade operations. There are four basic types of participants in palm and palm kernel oil trade, namely: Traders, associated with all commercial activities and including farmers selling exfarm, crushing and refining plant managers purchasing the palm raw materials (FFBs), buyers at corporate head offices, government purchasing bodies, brokers, commission agents, seat holders at commodity exchanges dealing in palm products, and even physical persons who may speculate from time to time. Two types of trading exist in palm and palm kernel oils: physical (cash) trading and trading in futures (commodity exchanges) 28. Traders in physical markets, generally called cash traders, have specific quantities of palm products of particular grades and specifications to buy from merchandisers and to move on to customers. They are therefore involved in logistics and assume responsibility for transport and shipping. Commodity brokers are the traders responsible for arranging the purchase or sale of palm and palm kernel oils in commodity exchanges. 25 Please note that nearly all trade figures throughout the study are expressed in quantity, rather than value, in order to avoid the impact of exchange rate on the value of trade 26 See World Bank country classification at 27 Marketing is the process of planning and executing the conception, pricing, promotion and distribution of goods and services. Trade is the proper exchange of goods and services. 28 Physical trading (also named cash trading) involves the actual movement of goods from origin to destination and is associated with cash contracts and documents on insurance, shipping and storage. Trading in futures concerns transactions carried out under futures contracts. This type of trading allows offsetting some of the risks of price fluctuations inherent to physical trading. 19