Palm oil is no longer the cheapest, jeopardizing its dominant market share

Palm oil’s reputation as an affordable and abundant crop makes it ubiquitous on store shelves as part of products ranging from cookies to cosmetics, but rising prices are threatening that dominance, Bloomberg analysts said.

Unlike soybeans, sunflowers and canola, palm oil is harvested year-round and requires less land to grow, which means it’s usually cheaper. However, the tropical commodity has ceded its status as the world’s cheapest vegetable oil to soybean oil this year when prices surged amid concerns over production curbs in Malaysia and Indonesia, as well as plans to shift more of its supply to biofuels.

If the premium to palm oil persists, bakery and cosmetics makers will have to make tough decisions: absorb the higher cost, pass it on to consumers, or change their recipes with less expensive alternatives. As the agency notes, some Brazilian manufacturers have already started using soybean oil as a substitute for palm oil.

Cosmetics companies use palm oil as a skin neutral, while food manufacturers worry that changing recipes could affect demand, as oils derived from olives or coconuts usually have a distinct flavor that limits their viability as substitutes.

“The end product will be ruined if producers just switch to other oils,” said Satya Varka, senior analyst at Fast Markets Palm Oil Analytics in Singapore, which predicts palm oil prices will fall after rising more than 25 percent this year.

The global soybean harvest is forecast to be plentiful, especially in Brazil, and the U.S. Department of Agriculture expects global demand for palm oil over soybean oil to be the lowest in three years this season. There is no quick fix for the palm sector’s production problems. Farmers in Malaysia and Indonesia are hesitant to replant old trees that take years to bear fruit, and Europe’s tough anti-deforestation measures make it difficult to clear new fields.

Tags: prices, palm oil