The recent popularity of palm oil is unsurprising given its high versatility, with its uses ranging from cooking oil and food additives, to biofuel and animal feed. In this respect, it is similar to other edible oils, such as soybean oil and canola oil.

But palm oils’ advantages are not limited to its versatility. It is also highly efficient, producing a yield that is nearly five times greater than the other seed oils. For example, palm produces 3.3 metric tons of oil per hectare, compared with just 0.4 metric tons per hectare for soy, and 0.7 metric tons per hectare for rapeseed and sunflower.

The production of palm oil is highly concentrated, with Indonesia the world’s largest producer of the oil by some margin at 42.5 million metric tons in 2019/20. Malaysia came in second at 19 million metric tons, with the three next biggest producers, Thailand, Colombia and Nigeria, producing only 5.7 million metric tons combined.

India is the world’s largest importer of palm oil, importing an estimated 9.75 million metric tons in 2019/2020. It is followed by the European Union and China, with the latter importing 7.3 million metric tons of the oil in 2019/20, enough to meet the country’s entire demand.

While palm oil prices had been on a steady upward trajectory for most of 2019, the sudden outbreak of the coronavirus put an immediate end to the rise. Since then, prices have taken a tumble due to the associated collapse in demand.

Where prices go from here will likely depend on a number of factors, such as the speed at which global economic activity rebounds, how severely palm oil production in Indonesia and Malaysia has been impacted by social distancing measures, the weather in key growing areas and the coronavirus-related aid measures introduced by governments to support growers and users.

Bursa Malaysia Derivatives and Dalian Commodity Exchange act as the global price benchmarks for palm oil, with their futures contracts denominated in Malaysian ringgit and renminbi respectively. Likewise, CME Group’s contracts are the standard for U.S. dollar-denominated palm oil.

In China, demand for palm oil is primarily driven by its use as a cooking oil, as a major ingredient in instant noodles and in the production of cosmetics.

Given its importance in food usage, China has in recent years made forays into going upstream in order to secure its supply of palm oil. For example, Julong Group has developed 50,000 acres of palm plantations in Indonesia. Meanwhile, the Chinese Academy of Tropical Agricultural Sciences is trialling growing oil-producing palm trees in Hainan. It remains to be seen if demand for palm oil in China can continue at its current level, with demand not only sensititive to the well publicized negative impacts of coronavirus, but also affected by other, less obvious risks.

More efficient, large-scale pig farming practices are expected to drive higher demand for soymeal, which is used as animal feed, creating a surplus of soybean oil, a by-product of soymeal production. As palm oil can be easily substitutable by soybean oil, this surplus could in turn reduce demand for palm oil imports. China’s soy imports from the United States have increased since the two countries agreed a Phase One trade deal, which saw tariffs on some shipments of U.S. soybeans waived.

Another threat comes in the form of altered consumer behavior. If consumers trend toward other forms of oil that are more available or perceived to be more sustainable, the situation could be harmful to palm oil production. Producers will need to manage this risk as the market evolves.

On the other hand, it is not all doom and gloom for palm oil, with a number of factors in play that could boost Chinese demand for the oil. Foremost of these factors is the U.S.-China trade deal. The deal has seen China commit to buy $40 billion worth of U.S. farm goods, and this could play into palm oil’s favor.

Given the sharp decline in pig population in China due to African swine fever, the country looks set to import more U.S. pork. Such an outcome would boost demand for palm oil, as soybean oil production would decline in line with reduced demand for soymeal in animal feed. If U.S. pork production and shipping is not too severely impacted by the coronavirus, the situation could lead to a higher demand for palm oil than ever before.

Another more obvious positive factor is price. Palm oil generally trades at a significant discount to soybean oil. If the price gap between palm oil and other edible oils widens, demand will not only be sustained, but will continue to increase in China.

China’s investments in overseas palm plantations and meat companies, such as the purchase of Smithfield Foods by Shuanghui International Holdings, now known as WH Group, may offer a glimpse into the country’s future plans to achieve domestic food security through acquisitions abroad.

On the other hand, China’s Minister of Agriculture and Rural Affairs Han Changfu recently said boosting the country’s pork production was a key priority, indicating the government does not want to rely on imports. Either way, China’s agricultural and food security policies are likely to have a significant impact on demand for palm oil going forward. Whether that demand rises or falls will depend on which route China takes.