Palm Oil Production: Up, Up, and Away

Spend Matters welcomes a guest post from Nick Peksa of Mintec Ltd.

The world demand for vegetable oils is increasing on an annual basis, as we require an additional 2-3 million tons per year of edible oils to cater for our increasing populations.

Palm oil is the world's most commonly produced and internationally traded edible oil. Unlike a number of oilseed markets, palm oil is a liquid market. You can store beans and oilseeds, but with palm oil, if you produce it you have to sell it. As an example, soybeans can be crushed some 12 months after harvest.

We can certainly try to cater for our supply requirement by planting more oil palms, but is there enough land available for planting?

Supply/demand balance
Since 1980, palm oil production has increased the most rapidly of all the four major oils, as both Indonesia and Malaysia stepped up production to meet increased demand. In total, palm oil production increased eight-fold between 1980 and 2007. Malaysia is running out of land, so our only hope is for Indonesia to increase future production. In the next 10 years or so, Malaysia will have only earmarked 5Mn hectares of land for new palm plantations. Thankfully, Indonesia has set aside some 23m hectares. Kalimantan will be the main island for expanding palm oil production.

Malaysian production will slightly grow to 23 million tons in 2020. Growth is expected from productivity increases, so much of future palm oil supply will be from Indonesia -- reaching 41 million tons in 2020. Palm fruit can be harvested year-round. However, local climatic conditions can have a bearing on production.

Weather factors
In Southeast Asia May to October is usually wet, with October to May usually dry. It is hot from March to August and cooler from August to March. Variations from these norms (for example, due to the El Niño-Southern Oscillation (ENSO) every three to eight years) can cause droughts, floods or other disturbances. The opposite effect, known as La Niña, leads to heavy rains across Indonesia and Malaysia. The last La Niña was in March 2008. There was a strong La Niña during 1988-1989, one in 1995, and in 1999-2000. A minor one occurred in 2000-2001 and a moderate La Niña began developing in mid-2007.

I have not looked into this in much detail -- however, there has been plenty of flooding in Asia in the last 1-2 years (have we entered into the next cycle?). This will need more exploration. If we are in La Niña phase, we will not just have to watch out for palm oil prices, but coconut products, pineapples, warm water prawns and other farmed fish species.

- Nick Peksa, Mintec Ltd.

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