POTS GHANA 2016 Plenary Paper Global Supply Outlook for Oils Fats in 20172018 Focus on West Africa Dr James Fry LMC International

Outlook for Oils & Fats in 2017/18
with a Focus on West Africa
Presentation to the Malaysia-Ghana POTS, 2017, Accra
by Dr. James Fry, Chair, LMC International, Oxford, UK
23rd October 2017
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Setting the scene for today
I spent the first six years of my working life in Africa, teaching at the universities in
Lusaka and Lubumbashi. Since then my colleagues and I have prepared many
studies on agriculture throughout the continent. Therefore, I am extremely pleased
to be in Ghana again, though for once not about cocoa or shea.
I will start my with a review of oil palm in Africa and Ghana in particular before I
turn to the outlook for the broad world market for palm and other vegetable oils.
To help you to understand the world market today, I must first explain the influence
of the recent weather shock, in the form of the El Niño, which has had a major
impact on palm oil production round the world over the past two years.
I will then turn to consider the behaviour of vegetable oil prices and how they have
become linked to the crude oil (i.e., petroleum) price, via the influence of biofuels.

I will conclude with forecasts of global palm oil output growth over the next year
and deduce the implications for the price of CPO.

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Malaysia-Ghana POTS, 2017

The outlook for palm oil

The oil palm industry in its original home
the West African experience

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3

Africa has lagged behind the rest of the world in CPO output


70

35%

60

30%

50

25%

40

20%

30

15%


20

10%

10

5%

0

0%
1975

1980
Africa

1985
1990
1995
Latin America etc


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2000
2005
SE Asia

Malaysia-Ghana POTS, 2017

2010
2015
Africa's share

Africa's share

Million tonnes of CPO

Since 1975, Africa’s share has plummeted from 33% to less than 4% this year.

Growth has been concentrated in Asia and Latin America

CPO output growth rates have actually crept up in Africa, but from a low base.
14%

Annual growth in CPO output

12%
10%
8%
6%
4%
2%
0%
1975-1985

1985-1995
Africa

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1995-2005

Rest of World

Malaysia-Ghana POTS, 2017

2005-2017

Africa sees lots of cross-border trade, e.g., Benin-Nigeria
Official statistics are not always reliable. They imply, for example, per capita CPO
demand of 50 kgs in Benin, 7 kgs in Nigeria, 27 in Ghana and 10 in Côte d’Ivoire.
3.5
3.0
2.5

Million tonnes

2.0
1.5
1.0
0.5
0.0

-0.5
-1.0
2000

2004
Net imports

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2008
Output

Imports

2012
Exports

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2016

Demand

Bei g et i porters, except i Côte d’Ivoire, lifts local prices
Nigeria’s big deficit in oils and large import tariffs lead to the highest CPO prices.
1,400

US$ per tonne of CPO

1,200
1,000
800
600
400
200
0
2008-2011
FOB SE Asia

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2012-2015
EU

Cote d'Ivoire

Cameroon

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Nigeria

Local refiners also benefit from import tariff protection
Apparent Cameroon and Nigeria refining margins are much larger than elsewhere.
2,000

US$ per tonne of RBD Olein

1,800
1,600
1,400

1,200
1,000
800
600
400
200
0
2008-2011

FOB SE Asia

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2012-2015

EU

Cameroon

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Nigeria

The outlook for palm oil

The oil palm industry in Ghana

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9

Ghanaian data state that traditional producers predominate
It is difficult to check estimates for the smallholder sector. We see that large
and medium sized mills/plantations together supply less than 100,000 tonnes.
Official CPO output figures, '000 tonnes

500
450
400
350
300
250
200
150
100
50
0
2008
Companies

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2010
Medium mills

Malaysia-Ghana POTS, 2017

2012
Small

The biggest challenge in Ghana is to raise local FFB yields
Local yields are well below S.E. Asian levels of over 20 tonnes. IPNI/Solidaridad
are now promoting Best Management Practices among Ghanaian smallholders.
14

FFB yields, tonnes per hectare

12
10
8

6
4
2
0
Companies
2008

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Medium mills
2010

Malaysia-Ghana POTS, 2017

Small
2012

The outlook for palm oil

The El Niño slump and subsequent recovery:
the evidence from Malaysia

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12

The 2015/16 El Niño was in line with the last major El Niño
.. but La Niña (Oceanic Niño Index below minus 0.5) never really materialised,
nor did a possible second El Niño drought (with an ONI above plus 0.5).
2.5

3 month moving average, ONI

2.0
1.5
1.0
El Niño

0.5
0.0
-0.5
La Niña

-1.0
-1.5
-2.0

Jan

Jul

Jan

ONI 1997-99

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Jul

Jan
ONI 2015-17

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Jul

Year-on-year growth in Malaysian CPO output has stuttered
Malaysia’s 2017 monthly year-on-year growth is lagging behind 1999 levels,
when the speed of the recovery from the El Niño drought was very dramatic.

Year on year, CPO output growth

60%
50%
40%
30%

20%
10%
0%
-10%
-20%
-30%
Jan

Jul
Jan
Growth 1997-99

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Jul

Jan
Jul
Growth 2015-17

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World CPO output will grow 6 mn mt in both 2017 & 2018
.. after falling nearly 7 million tonnes in 2016. This plots rolling 12 month yearon-year changes in world CPO output, led by Indonesia and Malaysia
12 month world CPO output growth mn mt

8
6

4
2
0
-2
-4
-6
-8
Q1.2014

Q1.2015
Indonesia

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Q1.2016

Q1.2017
Malaysia

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Q1.2018
Others

The outlook for palm oil

The link between CPO and petroleum prices:
the emergence of the price band

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16

2007 heralded the creation of a price band in which EU
vegetable oil prices trade at premia to Brent crude oil
In 2007, biofuels took over 10% of world vegetable oil output. This proved
sufficient to create a price band, with Brent crude oil prices setting the floor.

EU prtices (US$ per tonne)

2,100
1,800
1,500
1,200
900
600

300
0
Jan-05

Jan-07

Soy Oil

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Jan-09
CPO

Jan-11
Rapeseed Oil

Jan-13

Jan-15

Sun Oil

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Jan-17
Brent

There is a link between stocks and the CPO-Brent spread

600

3,050

500

2,800

400

2,550

300

2,300

200

2,050

100

1,800

0

1,550

-100
Jan-08 Apr-09

1,300
Jul-10

Oct-11

EU CPO Premium over Brent

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Jan-13 Apr-14

Jul-15

Average CPO Premium

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Oct-16
MPOB Stocks

MPOB Palm Oil Stocks, '000 tonnes

EU premium over Brent, US$ per tonne

When Malaysian stocks are high, the pressure on prices means that the EU
CPO premium over Brent is low; and when stocks are low, the premium is high.

Stocks will rise as we get to 2018, lowering the CPO premium

800

3,000

700

2,800

600

2,600

500

2,400

400

2,200

300

2,000

200

1,800

100

1,600

0

1,400

-100
Jan-08

1,200
Jan-10

Jan-12

EU CPO Premium over Brent

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Jan-14

Jan-16

Average Premium

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Jan-18
MPOB Stocks

MPOB Palm Oil Stocks, '000 tonnes

EU premium over Brent , US$ per tonne

Higher stocks will cut the premium from $315 in September to $250 by May. If Brent
stays at $58/bbl ($425/tonne), this will put EU CPO at $675 in May, vs. $720 now.

A new factor is Indonesia's CPO Fund and biodiesel mandate
The volume of biodiesel subsidised by the Indonesian CPO Fund moves in the
opposite direction to the CPO-crude oil spread, thus acting as a price stabiliser..
8

Amount able to be subsidised, mn tonnes

7
6
5

Oct 2015

4
3

Feb 2016

2
Mid-Oct 2017

1
525

545

565

585

605
625
645
665
685
705
FOB CPO price, US$ per tonne

725

745

This plots trade-offs of the mandate vs. FOB CPO at $55 Brent, with $750 million to spend.
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Palm oil is at the heart of vegetable oil pricing
Malaysian Palm Oil Board’s stock totals, published on the 10th of each
month, are the key influence on CPO prices and the price band.
The premium for EU CPO over Brent crude is inversely related to the
level of MPOB stocks, with the average CPO premium close to $250.
The Indonesian CPO Fund collects a large sum (approaching $1,000
million this year) from export levies on all exports of palm products.
The Fund subsidises palm biodiesel, guaranteeing a fixed margin to
producers, while the subsidy keeps biodiesel is as cheap as diesel.
The amount of palm oil used in the mandate is therefore inversely
(i.e., negatively) related to the CPO premium over diesel in S.E. Asia.
This reinforces the price band. It reduces the build-up of stocks (and
thus softens the fall in the CPO price) when there is a large supply
surplus; and it cuts the use of CPO for biodiesel (dampening the rise
in the price) when supplies are tight and stocks are low.
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21

The current situation in the seed oil sector
The outlook for rapeseed and sunflower crops this year is for little
change in the total harvest from the level in 2016. Therefore, supplies
of these two seed oils should be adequate.
Soybeans are becoming a crop that seems to survive the usual US
crop scares for fear of droughts in July/August, since one or two
heavy rains now seem able to produce an excellent harvest. What
matters, however, is how the demand for soybean meal is developing,
since soybean oil is only obtained when soybeans are crushed for
meal (which represents about 80% of the output after crushing).
China continues to surprise everyone, including itself, with steady,
high growth in meal demand, and this means that worldwide soybean
oil supplies are growing in parallel, reducing China’s palm oil imports.
As a result, everyone looks to palm oil to give the lead to the market
and to set the level of prices for the entire vegetable oil complex.
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Summary and Conclusions
The behaviour of vegetable oil prices over the past decade is one of
the best examples of the Law of Unintended Consequences.
By taking more than 10% of world oils output, biofuels have linked
vegetable oil prices to those of petroleum, within a price band.
Within the oils complex, the only oil crop whose daily crop output has
to be stored as oil, not as oilseed, is oil palm. For this reason, and of
course also because it is now easily the world’s largest source of oils,
it plays the central role in the entire structure of vegetable oil prices.
Indonesia’s CPO Fund has brought an important stabilising element
to the price band, while reinforcing the central role of the band.
Seed oil prices tend to move together, thanks to their substitutability
in biodiesel output and food use, but they cannot escape from CPO.
With the recovery in CPO output after El Niño, we are set for a period
of lower price premia for all vegetable oils over Brent crude.
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The outlook for palm oil

Thank you for your attention

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While LMC has endeavoured to ensure the accuracy of the data, estimates and forecasts contained in this presentation,
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LMC International can accept no liability regarding information analysis and forecasts contained in this presentation.
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