Palm oil prices declined this year due to supply deficit

Palm oil, known for its affordability and abundant supply, has experienced a sharp price increase of nearly 30% this year due to supply constraints. This marks a significant deviation from its historical pricing, as palm oil typically holds a notable discount compared to soybean oil, averaging $170 per metric ton over the last decade. Recent production issues in Indonesia, the largest producer, have significantly tightened global supplies. The use of palm oil as a biofuel additive in major producing countries has further strained exportable volumes.

Unlike soybeans, which can be replanted biannually, palm oil harvesting occurs year-round, making production issues slower to resolve. Palm oil production is heavily reliant on Malaysia and Indonesia, which collectively account for 83% of global output and 86% of exports. This concentrated supply chain leaves little room for disruptions, causing volatility in the market. The result is an unusual premium for Malaysian palm oil futures, currently priced about $145 higher per ton than Chicago soybean oil futures, marking the steepest price gap in decades.

Soybean and Other Vegetable Oils

While palm oil prices surged, soybean oil prices have dropped over 11% this year, driven by record global soybean production. The geographical diversity of soybean oil production and exports provides stability compared to palm oil’s concentrated supply chain. Argentina and Brazil dominate soybean oil exports, while the United States and China lead production, accounting for a combined 47% of global output.

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Soybean oil exports from the United States have recently recovered after a two-year decline caused by soaring domestic biofuel demand. This resurgence aligns with the widening price gap between soybean and palm oil. Meanwhile, global rapeseed and sunflower oil production is projected to shrink in the upcoming season, potentially boosting demand for soybean oil. These dynamics indicate that soybean oil may continue to gain prominence in the vegetable oil market while limiting the downside price risks for competitors.