The war in Ukraine has pushed prices of agricultural products to historically high levels, and concerns about global food security occupy headlines and world leaders’ minds, as demonstrated by recent IMF and World Bank meetings. So far, much of the attention has focused on grains, particularly wheat—because of its importance in diets, and the predicament of countries where wheat accounts for a large share of calories consumed, is largely imported, and is dominated by supplies from the Black Sea.
Here, we focus on another important, emerging food security issue: The war’s impact on vegetable oils. The Black Sea countries are large exporters of sunflower oil, and the crisis has pushed vegetable oils prices significantly higher, and also triggered trade policy responses around the world that further restrict supplies and raise prices.
This post examines the unfolding impacts on the global market for vegetable oils, including additional factors affecting prices such as biofuel policies and export restrictions in the Black Sea and elsewhere.
Vegetable oils are a key item in diets around the world and an essential source of fats, accounting for about 10% of daily caloric food supply (300 kcal per day per person), making them the second most important food group after cereals. Vegetable oils are also a nutritional source of omega-3 and omega-6 fatty acids and vitamins E and K. Vegetable oils are, of course, an essential cooking item, particularly for poor consumers unable to shift to more expensive butter or other animal fat-based products.
As with a number of other commodities, prices for many vegetable oils were at very high levels prior to the invasion in February. Since then, vegetable oil prices have risen by almost 30% in average (see figure 1).
FIGURE 1
Sunflower oil has been most directly affected with an increase of more than 40% since the day of the invasion. It accounts for about 13% of vegetable oils traded in global markets, and Ukraine and Russia account for about 50 and 25%, respectively, of the sunflower oil traded in the world. Since vegetable oils require little or no processing, high prices have already been passed through to consumers, and some retail shortages have been reported.
An overview of the vegetable oil market
Vegetable oils are heavily traded, with imports representing about 40% of global consumption, especially when compared to other commodities, e.g. less than 20% for grains. Three-quarters of countries (Figure 2) depend on world markets for at least half of their domestic needs.
FIGURE 2
As a result, most countries are more exposed to vegetable oil export shocks compared to cereals, which are less traded and in which many countries are relatively self-sufficient.
Together, palm oil (58%), soybean oil (14%), sunflower oil (13%), and rapeseed (canola) oil (7%) account for 92% of vegetable oils traded in world markets on average between 2019 and 2021. The remaining 8% includes diverse, locally important oils such as olive oil, cottonseed oil, peanut oil, safflower oil, and palm kernel oil.
Indonesia and Malaysia accounted for 92% of total palm oil exports over 2019-2021. Major soybean oil exporters include Argentina (46% of global exports over the period), Brazil (10%), the European Union (8%), and the United States (8%). Canada is the major exporter of rapeseed (canola) oil, accounting for 58% of rapeseed oil exports, but Russia (13%), EU (8%), and Belarus (7%) are also important exporters.
Prior to the Russian invasion of Ukraine, global vegetable oil supplies had tightened due to a variety of factors. Drought in South America has caused a sharp reduction in soybean yields, particularly for its largest producer, Brazil. As a result, soybean exports for Argentina, Brazil, and Paraguay are forecast to decline by 5% from last year's levels and vegetable oil exports are estimated to be largely unchanged. Malaysia palm production declined due to the impacts of Typhoon Rai in Dec. 2021 and continuing acute labor shortages and other issues the industry has faced since 2019, amplified by the COVID-19 restrictions on worker mobility. Drought-impacted Canadian rapeseed production for 2021/22 declined 35% from the previous year, despite an 8% increase in planted area. As a result, Canada’s rapeseed exports are estimated to fall by 50%, and rapeseed oil exports down year-over-year by 20%.
Then came the invasion. For vegetable oils, the most immediate global disruptions came in exports of sunflower oil. Important markets include India, the EU, and China, which together account for over 75% of total Ukraine exports. Port closures have prevented roughly half of the sunflower oil that typically would have been exported from last year's harvest from leaving in the country; the only alternative is more costly routes to the west through Romania or Poland. Processing facilities remain disrupted, and much of Ukraine's sunflower farming area lies to the east of the Dnieper River where much of the fighting has now Russian exports are currently limited under the joint effects of maritime trade dirsuption in the Black Sea, the implementation of an export quota by Russian authorities and the effects of sanctions on business transactions.
Vegetable oils vary in flavor and uses for different foods, but are largely substitutable for many purposes. As a result, vegetable oil prices tend to move together (Figure 1). Nonetheless, substitutions can create headaches for food manufacturers because of allergy issues and national labeling requirements. For example, France recently announced that food manufacturers could substitute sunflower oil in their products but must give consumers a basic indication of any recipe change within two months. At the end, these adjustments will create production bottlenecks and some shortages, while increasing production costs and at the end, prices for consumers.
Biodiesel production exacerbates supply shortages
Another issue affecting global vegetable oil supplies and prices is the recent growth of biodiesel capacity. Driven largely by regulations that mandate their blending in fuel supplies and subsidies encouraging their use, production of biodiesel fuels has grown over the past 20 years from less than 1% of total vegetable oil use in 2003 to almost 15% today (Figure 3). Major programs include the U.S., Argentina, and Brazil (primarily soybean oil), Indonesia and Malaysia (palm oil), the EU and Canada (primarily rapeseed oil and palm oil).
FIGURE 3
Major programs include the U.S., Argentina, and Brazil (primarily soybean oil), Indonesia and Malaysia (palm oil), and the EU and Canada (primarily rapeseed oil and palm oil).
Biodiesel mandates are putting additional pressure on global vegetable oil prices. Because of mandates, demand for vegetable oils as a feedstock for biodiesel production is fairly unresponsive to changes in prices. As a result, price volatility tends to increase when supplies are short.
Export restrictions further threaten vegetable oil supplies
Amid the current crisis, trade restrictions imposed by major vegetable oil exporters have increased price volatility and with it, the vulnerability of food-insecure households around the world. Calculations based on IFPRI's Export Restrictions Tracker indicate that about 43% of vegetable oils traded in global markets are affected by some form of export restriction. After implementing a progressive import levy on palm oil in March, Indonesia announced an export ban on crude and refined palm oil, starting April 28. How long that ban will remain in place is unclear, but restrictions will further compound the import needs of other countries, such as India and Bangladesh, which depend heavily on palm oil to meet their consumption needs.
Export restrictions have also disrupted the soybean oil market. On March 13, Argentina restricted exports of soybean oil and meal, then altered course on March 31, permitting exports but raising export taxes on those products from 31% to 33%.
All of these factors have contributed to keeping vegetable oil prices at record levels, and increased for countries.
Conclusions
As with other key commodities affected by the war, higher prices will have an adverse impact on consumers, particularly those poorest households already threatened by food insecurity.
How long high prices persist will depend much on how quickly peace returns to Ukraine and how long its agricultural economy takes to recover. Under the best of circumstances, however, prices are likely to remain high throughout this year and into 2023. A survey of U.S. planting intentions suggests that U.S. farmers intend to plant a record level of soybean area this year and early indications suggest that South American soybean production and EU rapeseed production could rebound as well.
The 31 million metric tons of vegetable oil currently converted into biodiesel globally represent an equivalent amount of calories to feed more than 320 million people per year. Thus, suspending biofuel mandates, or restricting mandates to non-edible oils or used cooking oils, could bring welcome supplies of edible vegetable oils to the market; though that is unlikely to happen given the strong political support these policies enjoy. Similarly, export restrictions threaten to exacerbate supply shortages, particularly for key vegetable oils like palm oil. As we saw in 2007/08 and 2010/11, such restrictions can contribute to significant increases in prices. Hopefully, restrictions such as the Indonesian ban on palm oil exports will only be temporary, and will not spread to other countries. If not, higher prices will only make it more costly for the world's poor to meet food security and nutrition needs.
Joseph Glauber and David Laborde are Senior Research Fellows with IFPRI's Markets, Trade, and Institutions Division. Abdullah Mamun is a Senior Research Analyst with MTID. The opinions expressed are those of the authors.
