Edible Oils are Facing a Supply Crunch

Edible oil prices have hit record highs this year driven by strong demand. The diversification of the use of edible oils into a biofuel has led to the commodity becoming an increasingly important part of the agriculture complex.

Palm oil is the most commonly produced edible oil, followed by soybean oil, with rapeseed oil and sunflower oil accounting for a smaller share of the market. Production of palm oil is highly concentrated, with 85% of the world’s supply coming from Indonesia and Malaysia. Meanwhile, soybeans, from which soybean oil is extracted, are largely grown in North and South America.

While edible oils have long been used in cooking and as a food ingredient in varied food formulations, it is their growing use as biofuel that is behind the recent spike in demand. As governments around the world introduce mandates stipulating that a certain percentage of fuel must come from renewable sources, such as California’s Low Carbon Fuel Standard, demand for biofuel has soared. Given the massive size of the energy landscape, combined with many countries setting net zero carbon targets, there is potential for demand in this area to grow significantly in the years ahead. In fact, the market for edible oils is expected to grow at a compound rate of 7.6% between now and 2029.

In the past, supply has largely been able to meet demand. Soybeans compete with corn in terms of agricultural acreage. As a result, when high demand leads to elevated soybean prices, farmers traditionally switch from growing corn to soybeans, enabling this demand to be met and prices to stabilize.

But supply of palm and soybean oil has not been able to keep pace with the rising demand caused by the growing use of both oils for biofuel. The trees from which palm oil is extracted take time to grow, while there has also not been a significant increase in agricultural land given over to soybean production. As a result of this mismatch between supply and demand, prices have risen. At the same time, the steep increase in energy prices has put further upward pressure on edible oils, due to their use as a biofuel.

Over the shorter term, the war in Ukraine has further stoked edible oil prices. Russia and Ukraine account for nearly 80% of global sunflower oil exports, but exports have been hit by sanctions on Russia and Ukrainian ports being closed. Edible oils tend to be interchangeable, so countries which were previously major consumers of sunflower oil, have switched to palm oil and soybean oil, creating an additional surge in demand. Meanwhile, labor disruption caused by Covid-19 in Malaysia has hit production and put further pressure on prices.