POTS GHANA 2016 Plenary Paper Global Supply Outlook for Oils Fats in 20172018 Focus on West Africa Dr James Fry LMC International

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Outlook for Oils & Fats in 2017/18

with a Focus on West Africa

Presentation to the Malaysia-Ghana POTS, 2017, Accra

by Dr. James Fry, Chair, LMC International, Oxford, UK

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Setting the scene for today

I spent the first six years of my working life in Africa, teaching at the universities in Lusaka and Lubumbashi. Since then my colleagues and I have prepared many studies on agriculture throughout the continent. Therefore, I am extremely pleased to be in Ghana again, though for once not about cocoa or shea.

I will start my with a review of oil palm in Africa and Ghana in particular before I turn to the outlook for the broad world market for palm and other vegetable oils.

To help you to understand the world market today, I must first explain the influence of the recent weather shock, in the form of the El Niño, which has had a major

impact on palm oil production round the world over the past two years.

I will then turn to consider the behaviour of vegetable oil prices and how they have become linked to the crude oil (i.e., petroleum) price, via the influence of biofuels.

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The oil palm industry in its original home

the West African experience

The outlook for palm oil

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Africa has lagged behind the rest of the world in CPO output

Since 1975, Africa’s share has plummeted from 33% to less than 4% this year.

0%

1975 1980 1985 1990 1995 2000 2005 2010 2015

A

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Growth has been concentrated in Asia and Latin America

CPO output growth rates have actually crept up in Africa, but from a low base.

0%

1975-1985 1985-1995 1995-2005 2005-2017

A

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Africa sees lots of cross-border trade, e.g., Benin-Nigeria

Official statistics are not always reliable. They imply, for example, per capita CPO demand of 50 kgs in Benin, 7 kgs in Nigeria, 27 in Ghana and 10 in Côte d’Ivoire.

-1.0

2000 2004 2008 2012 2016

M

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Bei g et i porters, except i Côte d’Ivoire, lifts local prices

Nigeria’s big deficit in oils and large import tariffs lead to the highest CPO prices.

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Local refiners also benefit from import tariff protection

FOB SE Asia EU Cameroon Nigeria

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The oil palm industry in Ghana

The outlook for palm oil

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Ghanaian data state that traditional producers predominate

It is difficult to check estimates for the smallholder sector. We see that large and medium sized mills/plantations together supply less than 100,000 tonnes.

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The biggest challenge in Ghana is to raise local FFB yields

Local yields are well below S.E. Asian levels of over 20 tonnes. IPNI/Solidaridad are now promoting Best Management Practices among Ghanaian smallholders.

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Companies Medium mills Small

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The El Niño slump and subsequent recovery:

the evidence from Malaysia

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The 2015/16 El Niño was in line with the last major El Niño

.. but La Niña (Oceanic Niño Index below minus 0.5) never really materialised,

nor did a possible second El Niño drought (with an ONI above plus 0.5).

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Jan Jul Jan Jul Jan Jul

3

ONI 1997-99 ONI 2015-17

El Niño

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Year-on-year growth in Malaysian CPO output has stuttered

Malaysia’s 2017 monthly year-on-year growth is lagging behind 1999 levels, when the speed of the recovery from the El Niño drought was very dramatic.

-30%

Jan Jul Jan Jul Jan Jul

Y

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World CPO output will grow 6 mn mt in both 2017 & 2018

.. after falling nearly 7 million tonnes in 2016. This plots rolling 12 month year-on-year changes in world CPO output, led by Indonesia and Malaysia

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Q1.2014 Q1.2015 Q1.2016 Q1.2017 Q1.2018

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The link between CPO and petroleum prices:

the emergence of the price band

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2007 heralded the creation of a price band in which EU

vegetable oil prices trade at premia to Brent crude oil

0

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

E

Soy Oil CPO Rapeseed Oil Sun Oil Brent

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There is a link between stocks and the CPO-Brent spread

When Malaysian stocks are high, the pressure on prices means that the EU CPO premium over Brent is low; and when stocks are low, the premium is high.

1,300

Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14 Jul-15 Oct-16

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Stocks will rise as we get to 2018, lowering the CPO premium

Higher stocks will cut the premium from $315 in September to $250 by May. If Brent stays at $58/bbl ($425/tonne), this will put EU CPO at $675 in May, vs. $720 now.

1,200

Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18

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A new factor is Indonesia's CPO Fund and biodiesel mandate

The volume of biodiesel subsidised by the Indonesian CPO Fund moves in the opposite direction to the CPO-crude oil spread, thus acting as a price stabiliser..

1

525 545 565 585 605 625 645 665 685 705 725 745

A

FOB CPO price, US$ per tonne

Mid-Oct 2017 Oct 2015

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Malaysian Palm Oil Board’s stock totals, published on the 10

th

_{of each}

month, are the key influence on CPO prices and the price band.

The premium for EU CPO over Brent crude is inversely related to the

level of MPOB stocks, with the average CPO premium close to $250.

The Indonesian CPO Fund collects a large sum (approaching $1,000

million this year) from export levies on all exports of palm products.

The Fund subsidises palm biodiesel, guaranteeing a fixed margin to

producers, while the subsidy keeps biodiesel is as cheap as diesel.

The amount of palm oil used in the mandate is therefore inversely

(i.e., negatively) related to the CPO premium over diesel in S.E. Asia.

This reinforces the price band. It reduces the build-up of stocks (and

thus softens the fall in the CPO price) when there is a large supply

surplus; and it cuts the use of CPO for biodiesel (dampening the rise

in the price) when supplies are tight and stocks are low.

Palm oil is at the heart of vegetable oil pricing

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The outlook for rapeseed and sunflower crops this year is for little

change in the total harvest from the level in 2016. Therefore, supplies

of these two seed oils should be adequate.

Soybeans are becoming a crop that seems to survive the usual US

crop scares for fear of droughts in July/August, since one or two

heavy rains now seem able to produce an excellent harvest. What

matters, however, is how the demand for soybean meal is developing,

since soybean oil is only obtained when soybeans are crushed for

meal (which represents about 80% of the output after crushing).

China continues to surprise everyone, including itself, with steady,

high growth in meal demand, and this means that worldwide soybean

oil supplies are growing in parallel, reducing China’s palm oil imports.

As a result, everyone looks to palm oil to give the lead to the market

and to set the level of prices for the entire vegetable oil complex.

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The behaviour of vegetable oil prices over the past decade is one of

the best examples of the Law of Unintended Consequences.

By taking more than 10% of world oils output, biofuels have linked

vegetable oil prices to those of petroleum, within a price band.

Within the oils complex, the only oil crop whose daily crop output has

to be stored as oil, not as oilseed, is oil palm. For this reason, and of

course also because it is now easily the world’s largest source of oils,

it plays the central role in the entire structure of vegetable oil prices.

Indonesia’s CPO Fund has brought an important stabilising element

to the price band, while reinforcing the central role of the band.

Seed oil prices tend to move together, thanks to their substitutability

in biodiesel output and food use, but they cannot escape from CPO.

With the recovery in CPO output after El Niño, we are set for a period

of lower price premia for all vegetable oils over Brent crude.

Summary and Conclusions

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Thank you for your attention

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This presentation and its contents are to be held confidential by the client, and are not to be disclosed, in whole or in part, in any manner, to a third party without the prior written consent of LMC International.

While LMC has endeavoured to ensure the accuracy of the data, estimates and forecasts contained in this presentation, any decisions based on them (including those involving investment and planning) are at the client’s own risk.

LMC International can accept no liability regarding information analysis and forecasts contained in this presentation.

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