By John Baize

Demand for U.S. soybean oil may increase as concerns mount against its largest competitor. Global palm oil production initially surpassed soybean oil production in the 2004-05 marketing year, and most forecasts call for it to be 21 percent greater than soybean oil production in the 2009-10 marketing year. Palm oil’s high productivity gives it a competitive edge. Top producers in Southeast Asia produce over six times more oil per acre than the average soybean oil yield in the United States.

High productivity enabled palm oil to become the most important vegetable oil in the world because it can be sold at a sizable discount compared with soybean oil and other vegetable oils. This makes palm oil the number one vegetable imported by developing countries. It also makes palm oil the vegetable oil of choice for a growing share of the world’s biodiesel industry.

Palm oil also has powerful detractors. Environmental groups such as Greenpeace and the World Wildlife Fund blame the oil palm industry for widespread destruction of tropical rainforests in Indonesia, Malaysia, Papua New Guinea and elsewhere. They claim that the destruction of the rainforests releases huge amounts of carbon dioxide into the atmosphere through burning and by the destruction of peat bogs. They also claim that palm oil production destroys critical habitats for endangered species such as orangutans. Some organizations have mounted campaigns against food companies in Europe urging them to stop using palm oil in their products. And now the environmental groups are conducting similar campaigns against European Union (EU) biodiesel producers who use palm oil as a feedstock.

Several large European food companies recently stopped purchasing palm oil from a few large palm oil producers that environmental groups claim continue to destroy rainforests and wildlife habitat. Nestlé and Unilever, two of the world’s largest food companies, stopped sourcing palm oil from Indonesia’s Sinar Mas, the world’s second-largest palm oil producer. Finland’s Nest Oil said it will drop Malaysia’s IOI Corp as a supplier for the more than 2 mmt of palm oil it needs for biodiesel production if reports prove true that the company is continuing to destroy rainforests in Borneo. Several French firms stopped using palm oil completely because of environmental concerns. Environmental groups are pressing the EU to prohibit biodiesel made with palm oil from counting toward biodiesel blending requirements.

As food and biodiesel companies around the world reduce their use of palm oil, the result likely will be increased demand for soybean oil. That particularly may be the case for U.S. soybean oil since there is no perception by buyers that U.S. soybeans are being grown in an environmentally destructive way. This is likely to increase the premium food and biodiesel companies will be willing to pay for soybean oil versus palm oil. This should help support soybean prices at a time of growing global soybean supplies.

posted by Expert 12:37 pm