1. Prospects for world supply & demand of vegetable oils - global challenges and implications for the oil palm agro-industry Peter Thoenes Trade and Markets Division Food and Agriculture Organization of the U.N.

2. Oilcrops market outlook and oil palm challenges
Overview
Medium-term outlook for the global oilcrop market
Global food demand, food security, resource issues and climate change
The case of oil palm
Emerging recommendations 2

3. Oilcrops market outlook and oil palm challenges
Medium-term outlook for the global oilcrop market
Price projections
Supply projections
Demand projections (incl. biofuel)
Trade Projections
Sources of uncertainty
model-based projections generated by OECD-FAO
entire agricultural sector, including biofuel
only four main oilcrops & products covered
10-year horizon
focus on vegoils ... palm oil 3

4. Oilcrops market outlook and oil palm challenges
a) Price projections for oilseeds, oils, meals
overall:
- above historical averages
continuing demand expansion, food and non-food
below average s-t-u ratios for oilseeds and products
in nominal terms:
- below 2007/08 peaks
- exceeding average oilseeds +45%
vegoils +70%
meals +30%
- annual growth rates: 1-2%
- likelihood of continued price volatility 4

5. Oilcrops market outlook and oil palm challenges
palm oil remains the lowest-priced oil
in real terms:
- stable (as opposed to historical
downward trend!)
- above average:
vegoils +30% (outstanding!) 5

6. Oilcrops market outlook and oil palm challenges
crude oil price assumption:
moderate rise to USD 70 in 2018
(60% above average)
b) Supply projections (oilseeds, vegoils)
further increase in global output (2018 over avg.):
oilseeds +32%, vegoils +44%
exceeding other crop sectors
concentrated in developing countries
but general reduction in annual growth rates (compared to past 10 years)
limited yield improvements
slower area expansion, esp. in developing (e.g. Lat.America) 6

7. Oilcrops market outlook and oil palm challenges
EU vegoil production continues to expand: +26% (from domestic and imported seed)
palm oil:
fastest expanding vegoil (ahead of soy oil)
driven by food and industrial demand
main factor in Indonesia: area; in Malaysia: yield
share in total vegoil output: grows to 30%
c) Demand projections for vegoils
further expansion: +44%
commodity group with fastest growing consumption: 3% p.a.
but growth slowdown
reduced population growth + saturation effects
firm prices
developing countries contribute most (esp. in Asia)
population growth, income growth, low per caput consumption level
largest expansion: palm oil, followed by soyoil
EU and China account for 28% and 16% of global expansion 7

8. Oilcrops market outlook and oil palm challenges
Biodiesel demand
BD production:
• demand strongly driven by national utilization mandates plus subsidies
commercial viability not secured
• global BD production to more than double: +127% ( )
expansion in transport fuel
rising share of diesel in transp. fuel
shares of BD in total transport fuel
to remain modest
few important players: 8

9. Oilcrops market outlook and oil palm challenges
vegoils as feedstock
global vegoil use for BD to almost double:
from 16 (2009) to 31 mmt (2018)
weight of BD demand in total vegoil consumption:
to range (in 2018) between 18 and 95 %
main producers’ avg. rises from 11% in to 20 % in 2018 9

10. Oilcrops market outlook and oil palm challenges
Malaysia & Indonesia (palm oil)
slow development of emerging BD industry
BD industry to absorb less than 4% of palm oil output
low national consumption targets
increasing palm oil price (relative to BD and crude oil prices)
poor export prospects (increased competition, sustainability requirements)
weight of palm oil among BD feedstock to remain about unchanged
ca. 11% of total vegoil BD-use
ca. 9% of all BD produced
BD price:
to grow steadily
remaining well above fossil diesel prices 10

11. Oilcrops market outlook and oil palm challenges
BD trade
expected to double (6.7 mill litres in 2018)
5 main players: EU, Argentina, Malaysia, Indonesia, USA
share of BD trade in total BD production to fall slightly
(import demand increase less rapidly than production)
domestic policies, trade barriers, lack of harmonized biofuel specifications 11

12. Oilcrops market outlook and oil palm challenges
d) Trade projections (major vegoils)
50% expansion
production in main comsumption regions not keeping up with demand
fastest growing commodity
BF production triggers additional import demand
lead of developing countries
continued expansion in South-South trade
palm oil: remains most traded vegoil
Export market:
3 countries to supply 75%: Indonesia, Malaysia, Argentina
Indonesia & Malaysia (palm oil)
4-5% annual growth
80-90% of domestic production exported
Argentina & Brazil (soy oil)
moderate growth
other sources of growth: Canada, USA, CIS nations 12

13. Oilcrops market outlook and oil palm challenges
Import market:
developing countries to lead global imports (esp. China, India, other Asia)
but EU also contributes to expansion
EU imports to more than double (BD production)
esp. palm oil imports for food industry
to become biggest importer ahead of China
>50% of domestic vegoil consumption to stem from imports
strong import dependence in several countries
global market instability 13

14. Oilcrops market outlook and oil palm challenges
e) Sources of uncertainty
resumption of global economic growth: 2010 or later?
policy responses to global price volatility
high market concentration increases market instability
continued consumer concerns about environmental risks as well as GM products
exposure to developments in the energy market:
higher crude oil prices
lower crop production (via rising production costs)
reduce food consumption (via higher crop prices)
increase BD production
land reallocations triggered by food/fuel competition 14

15. Oilcrops market outlook and oil palm challenges
2. Global food demand, food security, resource issues and climate change
a) Food security
b) Global food demand, resource issues, climate change 15

16. Oilcrops market outlook and oil palm challenges
a) Food security
good medium- and longer-term market prospects
stable/slightly rising commodity prices
demand growth matched by production increase
developing nations participating in expansion of production, consumption and trade
deterioration in world hunger and food security
rise in number of people living below the hunger threshold
rising food prices
contributing factors:
temporary supply and demand imbalances
increased market instability
national interventions in markets
direct linkage energy & food prices
food/fuel competition
falling international investment flows
budgetary pressure on development aid
global economic slowdown 16

17. Oilcrops market outlook and oil palm challenges
b) Global food demand, resource issues, climate change
Long-term food requirements:
further rise in avg. per caput consumption (in kcal/person/day)
oilcrop products remain major contributors to future growth in developing country food consumption
Sources of production growth:
80% from higher land productivity: yield & cropping intensity
20% from area expansion
Productivity
developing country yield levels continue growing, but growth rates may fall! 17

18. Oilcrops market outlook and oil palm challenges
Land availability:
significant amount of land potentially suitable for soybeans and oil palm 18

19. Oilcrops market outlook and oil palm challenges
actual land availability is limited
competition among food crops, pasture uses, wood uses and other, new uses (energy crops, crops with low carbon footprint)
growing urban, industrial, infrastructural uses
only part of the land has high or at least good yield potential
considerable part of land consists of forest - conversion carries significant social/environmental costs
Climate change:
no consensus on ultimate net global impact on agric. production
global warming and changing rainfall patterns potentially
beneficial in high latitude regions
damaging in low latitude tropical areas
uncertainty regarding the effects of higher atmospheric CO2 concentration (carbon fertilization)
consensus:
food security to be affected
considerable scope to improve resilience via adaptation
until 2050: increased risk of water stress; rising incidence of extreme weather events
after 2050: significant impact on agr productivity (shifts in production frontiers) and on the global food system 19

20. Oilcrops market outlook and oil palm challenges
3. The case of oil palm
a) Growth factors: productivity and area
b) Area expansion issues
c) Productivity improvement
d) Socio-economic dimension
e) Palm oil as BD feedstock 20

21. Oilcrops market outlook and oil palm challenges
a) Growth factors: productivity and area
past growth:
strongly based on area expansion
of which 50-60% forest conversion
recent trend:
less primary forest conversion
more conversion of cultivated land
(rubber, degraded land, secondary forests)
yield levels:
only minor improvements
but considerable yield gaps 21

22. Oilcrops market outlook and oil palm challenges
b) Area expansion issues
limited actual potential - except on forest land
environmental costs associated with deforestation/other land conversion:
1.) carbon balance
net carbon balance calculations pose problems
oil palm carbon balance turns positive after
ca. 80 years – primary forest conversion
ca. 600 years – peatland conversion (high carbon stock)
ca. 10 years – previously deforested, degraded, idle land
(comparison soybean Brazil: forest 300 years, grassland 37 years) 22

23. Oilcrops market outlook and oil palm challenges
2.) reduction in biodiversity
highest in forest conversion
some improvement when degraded land is reclaimed
3.) additional problems associated with deforestation
land fragmentation
loss of forest habitats
land clearing through fire (traditional method, cost effective, common among smallholders)
c) Productivity improvement
1.) improved management practices
esp. in smallholder oil palm cultivation (closing the yield gap)
typically using less productive land
limited access to capital and labour
limited access to technical/managerial know-how 23

24. Oilcrops market outlook and oil palm challenges
2.) improved planting material
smallholder access (closing yield gap)
traditional selection and breeding methods
19-year selection cycle
limited supplies of improved material
genetic modification
2008 breakthrough: sequencing of oil palm genome
much shorter selection cycle
risk: GM opposition by end-consumers
d) Socio-economic aspects
important benefits
employment and income generation
improved access to health care, education and other social services
attractive for smallholders (good return-to-input ratio)
dangers associated with deforestation
erosion of traditional culture, income sources, self-sufficiency
conflicts over land tenure right
workforce issues
labourers’ rights not respected
ethnic conflicts in case of migrant labourers
smallholder dependence on large mills (setting the FFB price) 24

25. Oilcrops market outlook and oil palm challenges
e) Palm oil as BD feedstock
lowest-priced feedstock with good energy efficiency
competition from vegoils that enjoy direct policy support
all vegoil feedstock (as well as ethanol feedstock) achieve limited net carbon savings compared to fossil fuels
esp. when counting direct/indirect land use changes
all food-crop based BF production affects food supply and food prices
rising market instability
negative repercussions on food security
investment uncertainties:
further changes in policy interventions
(food security, environmental & budgetary considerations, standards)
future crude oil-vegoil price ratio
advent of (replacement by) 2nd generation feedstock & technologies 25

26. Oilcrops market outlook and oil palm challenges
4. Emerging recommendations
a) National priorities
oil palm cultivation
minimize conversion of primary forests
encourage use of idle, degraded and other marginal land
promote best management practices in production & processing
sustainable yield improvement
reduced land degradation, pollution etc.
biodiversity preservation , cover crops, IPM etc.
support smallholder involvement
improve access to high-yielding varieties
promote improved plantation management
encourage establishment of smallholder cooperatives
retain diversification
promote development of small-scale mills
secure funding for R&D and infrastructural works
enforce (and monitor adherence to) regulations
environmental protection
land tenure guarantees, labour rights etc.
product quality (sustainability standards) 26

27. Oilcrops market outlook and oil palm challenges
Palm oil-based biodiesel production
favour production on land not suitable for food production
allow gradual expansion of BF industry; put in place entire commodity chain;
provide appropriate regulatory framework
favour production for domestic market
general support to rural development and overall economic growth
meeting fuel needs in areas where feedstock is grown, esp. less accessible areas
production for export offers limited scope
main consumers rely on domestic sources (except EU)
various barriers to trade remain (lack of harmonized specifications, sustainability certification, tariff protection) 27

28. Oilcrops market outlook and oil palm challenges
a) International priorities
Food security
coordinate national policies and market interventions to reduce food security risks
encourage establishment of social safety net schemes
accelerate multilateral trade liberalization
Biofuel sector
improve policy planning and coordination
harmonization of trade regulations, sustainability standards
promote transition to 2nd generation technologies and feedstock
Climate change
coordinate national policies
foster analysis of impact on global agric. & food systems
coordinate research & investment into adaptation measures 28

29. Oilcrops market outlook and oil palm challenges
promote schemes that reward reduced deforestation and forest degradation
(e.g. REDD) and other control measures
support voluntary, private sector initiatives on standards for sustainable production and processing (e.g. RSPO)
application is demanding and costly; economic return is uncertain
adaptation to smallholder environment needed
supporting legal/policy reforms required at national level
coordinate investment into agric. R&D (productivity enhancement) and facilitate technology transfer 29