Bearish prices for palm oil push Malaysia to consider crop cuts

Related tags Palm oil Vegetable fats and oils

Food makers enjoying bearish prices for palm oil used extensively
in food applications could see a rise as Malaysia, the world's
number one producer, builds plans to reduce palm oil production,
writes Lindsey Partos.

Haron Siraj, chief executive of Malaysia's palm oil council, warned this week that if prices continue to fall for this popular vegetable oil, the country will replant old palm trees.

This shrewd move could lift the market, currently trading at about $340 (€260), as replanting reduces palm oil production since there is no oil output from new trees for three years.

Siraj said that about 10 per cent of the 3.8 million Malaysian hectares is older than 25 years and needs replanting to increase production.

Palm oil is becoming increasingly important as an ingredient in a wide range of foods, not least because it is free of artery-clogging trans fats, formed when fats are hydrogenated to make them more solid and extend their shelf life. Because palm oil is semi-solid naturally, it does not require hydrogenation.

The oils also continues to benefit from a growing awareness of the health properties of the antioxidant-rich oil.

Palm oil is now second only to soybean oil in terms of global demand, accounting for 28 per cent of total edible oil sales.

Although widespread commercial plantings only began in the 1990s, Malaysia is now the world's largest producer of palm oil, with Indonesia coming up as a close second. Last year Malaysia produced 14 million tons and Indonesia 11 million, on a global total of 30 million tons.

Josh Dadd, an economist at the UK Home Grown Cereals Authority (HGCA), tells that the devastating Tsunami that struck the region last month, did not affect palm oil crops.

He says that prices for palm oil have been steadily falling over the last few weeks, due to the sheer volume of vegetable oils on the market at the moment.

Food firms are looking to cash in on the growing popularity of palm oil. A new palm oil plant - the biggest in Europe - is due to open in the Dutch port of Rotterdam in mid 2005, owned and operated by former Unilever subsidiary Loders Croklaan.

Now the property of Malaysian palm plantation owner IOI, Loders said it hoped to process 2,500-3,000 tons of palm a day.

"Palm opens real market opportunities for Loders Croklaan, as well as for our client companies who are looking to eliminate trans fats from their food products,"​ Etienne Selosse, CEO of Loders said last year.

Today, soybean and palm oil combined account for over half of all oil consumed in the world.

After tight crops in 2003, soy oil has come in at 35 million tons for 2004, offering some relief to prices, that in 2003, hit 15 year highs. Today, soy oil is selling for about $470 (€359) a ton.

The third largest vegetable oil crop, rape seed oil, reached 15 million tons and is currently trading at about $666 (€509) a ton.

"Rape oil prices have been rising on the back of increasing demand from food and biodiesel industries, despite record global supplies,"​ says Dadd.

The fourth largest vegetable oil crop, sunflower seed oil, reflects a similar picture to rape see oil, with prices becoming bullish on a tighter balance sheet. For 2004, world production reached 10 million tons. Prices are currently trading at around the $690 (€527) mark.

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