Palm Oil - agri benchmark

Page 0 Dessy Anggraeni, Yelto Zimmer Palm Oil – Economics of the driver of global vegetable oil markets

agri benchmark Global Forum Des Moines, 21st August 2014

Economics of the driver of global vegetable oil markets

Palm Oil -

Dessy Anggraeni, Yelto Zimmer

Thünen-Institut of Farm Economics


Why this study?

(1) Demand for vegetable oil is growing fast

(2) Many people wonder about palm oil

(3) Therefore we wonder about:

a) How are markets connected?

b) How competitive is palm oil compared to soybean oil?

c) What are the main drivers?


Contents

Part 1. Overview of global vegetable oil market

Part 2. Palm oil production system

Part 3. Economics of palm and soybean oil production


Ort Datum

Vorname Nachname Thünen-Institut für XXX

1. Overview of global vegetable oil markets


Breakdown of vegetable oil production (2002 vs. 2012)

Palm Oil 32%

Soybean Oil

26%

Rapeseed Oil

15%

Other Oil 27%

Source: FAOSTAT

2002 2012

Palm Oil 27%

Soybean Oil

30%

Rapeseed Oil

13%

Other Oil 30%

Palm oil in a fast growing market outperforms all other vegetable oils


Main palm oil exporters (2008 – 2012)

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

40.000

45.000

2008 2009 2010 2011 2012

in 1

00

0 t

on

s

Indonesia Malaysia Thailand Colombia Singapore Other

Source: UN COMTRADE


Markets for soybean & palm oil: closely connected

y = 1,1013x + 22,465 R² = 0,8911

0

200

400

600

800

1.000

1.200

1.400

1.600

1.800

0 200 400 600 800 1.000 1.200 1.400

Soyb

ean

Oil

Pri

ces

(USD

/t)

Palm Oil Prices (USD/t)

Source: World Bank, pink sheets (2014), own calculations


Ort Datum


2. Palm oil production system


Steps of palm oil production system

1. Seed preparation

2. Nursery (9-12 months)

3. Land Preparation

4. Immature (0-36 months)

5. Harvesting (3-20 years)


Pre nursery


Main nursery


Immature

Investment crop establishment app. 10.000 USD/ha


Harvesting: Cutting & collecting Fresh Fruit Bunches (FFB)

(1) Labor input: 110 hours/ha (or 45 h/ac) (2) Annual raw material production (FFB) : 23 t/ha (3) More or less year-round harvesting


Ort Datum


3. Economics of palm oil production vs. soybeans


Challenge to estimate cost of vegetable oil production

1. Both harvested products – fresh fruit bunches and soybeans – are multi-output products.

2. Hence: For a CoP analysis total cost need to be allocated to different outputs.

3. One option: revenue shares.


Allocating cost by revenue shares of palm oil

Fresh Fruit Bunch ~ 100%

Mesocarp Endocarp

Palm Oil ~ 21,5% PKE (Protein, Feed) ~ 2,8% Palm Kernel Oil ~ 2,2%

545 USD/t

7%

897 USD/t

9 %

857 USD/t

84 %

Revenue shares: Price based on World Bank Commodity Price Annual Average 2013


Allocating cost by revenue shares of soybeans

Soybeans 100%

Protein meal (feed) ~ 70% Soybean Oil ~ 18%

545 USD/t 66%

1.057 USD/t 34%

Price based on World Bank Commodity Price Annual Average 2013

Revenue shares:


Specifics of palm oil economics

1. High up front investment in crop establishment (app. 10.000 USD/ha)

2. 20-25 years depreciation for crop establishment investment

3. No revenues in the first 3 years

4. Lock-in effect after investment


0

1

2

3

4

5

6

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

MY1280PHG US700IA

Palm Oil Soybean Oil

Vegetable oil yield comparison (t/ha)

+/- 4,4 t differences of oil yield


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50

100

150

200

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350

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013


Seeds Nitrogen Phosphorus Potash Lime

Other fertilizer cost Herbicides Fungicides Insecticides Other pesticides

Direct cost (USD/t of oil)

+/- 140 USD/t difference in direct cost

(1) Clear advantage for palm oil in seeds and plant protection cost (2) Fertilizer cost on a comparable level

US700IA MY1280PHG


0

50

100

150

200

250

300

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013


Hired labor Family labor Contractor Machinery Diesel

Operating cost (USD/t of oil)

+/- 160 USD/t difference in operating cost

(1) Labor cost higher in palm oil than in soybeans (2) But: almost no machinery and diesel cost


0

100

200

300

400

500

600

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1000

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

MY1280PHG US700IA


USD

/ t

non-land cost land cost Annual crop establishment cost

Total cost: palm oil vs. soybeans oil (USD/t of oil)

Non-land cost ~ USD 400 Non-land

cost ~ USD 200

(1) Crop establishment cost in palm oil does not matter that much (app. 70 USD/t) (2) Land cost make the difference – 150 vs. 450 USD/t


Average raw material cost (Ø 2009-2013; USD/t of oil content)

(1) Palm oil is a very competitive product. (2) Due to recently bullish commodity markets, land cost in soybeans are very high –

when prices go down again land cost will go down as well.

350 USD/t

200 USD/t


Soybean oil is traded at a premium over palm oil

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20

40

60

80

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Pre

miu

m s

oyb

ean

oil

(USD

/t)

Price of palm oil (USD/t)

(1) The higher the prices, the higher the premium (2) At 400-600 USD/t (pre-boom price level) premium is at about 60 – 80 USD/t

Source: World Bank, pink sheets (2014), own calculations


Conclusions

(1) Even though soybean oil receives a premium of 60 - 80 USD/t, palm oil is an extremely competitive product.

(2) Cost advantages for palm oil in (a) input cost, (b) operating cost – except for labor -, and (c) land cost.

(3) High investments in palm oil establishment don‘t matter a lot on an annual and per tonne cost basis.

(4) Future directions of global vegetable oil markets will be primarely driven by palm oil.


Knowledge is our Business

Dr. Yelto Zimmer, Head of agri benchmark Cash Crop team

Thünen Institute of Farm Economics Bundesallee 50, 38116 Braunschweig Germany

phone +49 - 531-596-5155 mobile +49 - 173-5722723 e-mail [email protected] [email protected] internet www.agribenchmark.org www.ti.bund.de

Thank you for your interest in agri benchmark.

Dessy Anggraeni (MA), agri benchmark Cash Crop team

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Palm Oil - agri benchmark