Petroleum and Other External Factors Affect the Production of Oils and Fats

The complex nature of the oils and fats market makes it almost impossible to predict price levels of future movements. As oils and fats are a vital part of modern food supply chain a seemingly endless number of factors could potentially affect the direction and levels of movement. These influences range from the basic supply and demand issues to the effects of crude oil and transportation. But what are even subtler are socioeconomic factors that affect market prices like population growth and the GDP of nations and regions.

This is the task that has been set for Mintec at the Oils and Fats International Conference in Cairo this week.

One of the most interesting links we have noticed is how last year's drought in Russia affected the price of Palm oil in Malaysia. Below is a quick summary of our findings.

The Russian Wheat Crisis
In the summer of 2010, a severe drought was reported in Russia that resulted in close to a third of their wheat production loss. To ensure that the Russian population was fed, temporary changes in trade policy were made. The Russian Government introduced an export ban in August '10 for wheat (which expired in July '11). While the Russian people were happy, the ramifications were further reaching -- as Russia is the 4th largest wheat exporter in the world; in 2010, it supplied over 18m tonnes of wheat to the world markets.

Global Wheat Prices Rise
Looking at a calculated world index for wheat from both hemispheres the price increase form July 2010 to early 2011 was close to a 100% price increase.

What does this price increase mean?
As the stocks in the market place exhibit, there was enough wheat in the world to satisfy needs, so why did the Russian ban cause so many problems? The starting point for this analysis resides in the question: who does Russian export its wheat to?

Russian exports are orientated to the Middle East; Egypt imported 40% of its total requirement in 2009/10 TY with more than half of it coming from Russia. In Europe and the US, this massive price increase has not been felt as strongly, as the average percentage of income spent on food in the US is around 6.9% compared to an average of 30-40% of total income in the Middle East. Wheat is also a nutritional staple in the Middle East and in Q1 2011, these increases in basic food stuffs in Egypt caused food price inflation to reach 20%, the highest in the world.

Thinking back to Maslow's hierarchy of needs, this is often portrayed in the shape of a pyramid (which I will hopefully visit on Thursday), with the largest and most fundamental levels of needs at the bottom (food, water, sex, sleep), while the need for self-actualization is at the top. With the basic needs not met – we have a problem, the results were seen in the global news.

The effect on vegetable oils
The best way to summarise this is in a diagram. The Middle East is a world supplier of crude oil, tension in the Middle East leads to speculation, which leads to price rises in crude oil. Crude oil and bio-fuels have a close relationship in an inflationary market as there is a level of competition depending on price levels.

Hopefully, we can now see why you can't predict a price movement of a commodity as easily as you first think. We have not even considered the growth of wealth in China and how this effects world consumption of meat and farming practices, but I will leave that for another day.

- Nick Peksa, Mintec Ltd.

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