Monthly bulletin on Oils & Fats by Aveno

August 18th 2020

Substitution  in very dynamic market

The market, hence the production, of oils & fats is not static. In fact, it is a very dynamic global happening. Markets interact and many outside influences determine production and consumption. Besides weather conditions producers are faced with many variables which they do not control. 

Substitution is basic in commodity markets, e.g. technically all oils and fats can be used to make biodiesel. So, oils are affected by price changes in other oils as they all compete for a share in a global market. In the Philippines part of the traditional cooking oil, coconut oil, has been replaced by cheaper imported palm oil, leaving more coconut oil for export and for the production of mandated biodiesel! 

With a global production under 3 Mmt (million metric ton) coconut oil, compared to 76 Mmt of palm oil, this market is rather small. Eighty percent of global production comes from the Philippines and Indonesia while EU and the U.S. consume over 75% of the total supply. The fatty acids of coconut oil are easily and quickly absorbed by the organism and coconut oil is often used in baby food or animal nutrition (calves, piglets, etc.). But the biggest consumer of coconut oil remains the oleochemical industry. Facilitating foaming in soaps, this oil is also used in the formulation of detergents and shampoos. 

Similarly, many Spaniards have replaced olive oil by cheaper oils. But EU remains the leading producer, consumer and exporter of olive oil. Of the world’s forecasted production of 3.4 Mmt, EU is good for about 57% and good for 50% of global consumption. Olive oil is mostly used as salad oil. 

In a perfect virtual world, when supply of oils is bigger than demand, Adam Smith’s invisible hand would cause all prices to converge at the lowest level, being the price of heavy diesel (= the calorific value of the oils), to create demand. When demand is bigger than supply and all substitution possibilities have been exhausted, prices would all converge at the price of the most expensive oil and perhaps even higher, as to ration demand. But so far it has been difficult to capture the world in an excel sheet and because of humans, life is not that simple. 

Waste, residues and byproducts 

Some oils or fats are unintended byproducts, residues or waste from an intentional process to produce something: the winemaking industry generates a volume of seeds from the grapes, which after drying, can be pressed for grapeseed oil. More meat production creates more animal fat and the annually produced 8 Mmt of palm kernel oil is also a byproduct from palm oil production (in the past, this waste, the seed of the palm fruit, was often burned). 

Wood pulp production for paper generates the by-product crude sulphate soap (CSS) which can be burned as process fuel in the mill or be converted to crude tall oil (CTO). The mills need special equipment to turn CSS to CTO and if they have cheaper options for their process fuel, they will produce CTO. It is estimated that between 1.5 and 2 million MT of crude tall oil are produced each year. Tall oil is sold to companies in petrochemicals, road construction, inks and coatings and in recent years more often as feedstock for biodiesel, replacing other oils. (tall = pine tree) 

Corn oil comes from the “corn germs” which are a byproduct of corn milling to produce starches, glucose and ethanol. But ethanol can also be produced from sugar beets and sugar cane. Starches and glucose can also be produced from wheat which is sometimes cheaper and the byproduct wheat gluten makes wheat economically more attractive. Less milled corn means less corn oil. 

Of course, there are crops specifically meant to produce oil like the most produced and most consumed oil in the world: palm oil. 

Source: The International Union for Conservation of Nature (IUCN) 

It is often said that less land is required to produce 1 ton of palm oil than to produce 1 ton of soybean oil, the world’s second most produced oil. But that is a bit of a misrepresentation or lying by omission. It is undeniable that to satisfy oil demand one would need less land when producing palm, but soybeans are mostly produced to satisfy the demand for soybean meal. Soybeans yield 20% oil and 80% meal. The meal is a source of protein and a patch of palm trees does not yield much proteins which are nutritionally as indispensable as oils and fats. 

Older and more recent FAO reports say that the production of poultry meat, the world’s primary source of animal protein, and eggs rose dramatically in the past decades. There were projections that between 2000 and 2030, per capita demand for poultry meat was to increase by 271 % in South Asia, 116 % in Eastern Europe and Central Asia, 97%... etc. Recent data shows that total egg production grew from 62 million tons in 2008 to 77 million tons in 2018 or 24% in ten years. In 2018, China produced 466 billion eggs (34% of world production), making them the biggest producer. The point is that the majority of these chickens (broilers and layers) are fed soybean meal. A lot of chickens eat soybean meal and this has been one driver increasing global soybean production. When soybean meal consumption goes up, automatically the supply of soybean oil increases and this oil needs to find a home. Animal feed and biodiesel are good outlets. For the 20/21 season global soybean oil production is forecasted at 58.9 Mmt. 

In part 3 of this overview we will dig further into oil disappearance and add it all up in an excel sheet.

Read part 1

Copyright Aveno®

There is some complexity to the business we daily operate in. To help understand the business of being an edible oil and fat producer we've launched a bi-weekly newsletter.

Every two weeks we will share an update about edible oils and fats. You can find all previous updates on: https://www.aveno.be/search/label/bi-weekly

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