Mid September, Central Kalimantan.
As dusk darkened the orange of our 4 voluminous 2,000 ton storage tanks I asked the wiry mill manager how many tons of oil was inside. “Less than a 1,000,” he replied.
Why so little, given that the purchasing season of the edible oil year for 2017/18 starts this week?
It looks like the demand will outstrip the supply, consistent with a pattern of the ascendency of palm oil in the past decade or so. Here are three reasons why palm oil looks like it wil continue to be the runaway champions in the edible oil industry:
Palm oil has surpassed soy as the dominant edible oil
About a decade ago soy used to dominate the market since it was the staple crop of the US and China. But 10 years ago, due to an expansion in cultivated acreage beginning in the 1980s, palm oil first pulled up level with soy and quickly surpassed it.
Palm has not only been in the top spot since, but it is pulling ahead since. There was a blip two years ago when palm oil production declined and soy increased due to the La Nina phenomenon but palm recovered and has widened the gap with soy. This is a trend that will never reverse.
Demand for edible oil is about to surge
China, with its teeming millions, is often presumed to be the largest consumer of palm oil. It was but it is not longer. Indonesia is now the top consumer of palm oil in the world, relegating China to fourth place.
When the largest producer is also the largest consumer of palm oil, the rest of the world can expect less of the commodity to go around. With Indonesian expected to be the first country to chalk up an order of 10 million tons per year you can expect the demand worldwide to surge, especially compared to the slow demand over the past few years.
Supply is tightening
Thanks to the fervent planting activity beginning in the 1980s in Indonesia, palm oil supply growth was comfortably in the double digits by the early 2000s.
That supply growth has now slowed to the low single digits as new planting slowed. Given the time for palm oil trees to mature it is unlikely that supply would pick up soon.
So how will all of this affect the edible oil market?
For years the market has relied on palm oil because of the strong growth the industry has shown. As result no attention was placed on other crops and today there is literally no other oil able to meet the coming demand.
This is all good news for producers. Buyers, however, may have to pump themselves up for a dogfight if they are to secure enough edible oil.
Author: Sebastian Sharp, Head-Investor Relations at PT Eagle High Plantations Tbk.
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