January 24, 2011
 
Will palm oil shortage bring down Thai feed prices?
 
An eFeedLink Hot Topic  
 
by F.E OLIMPO
 
 
 
Severe drought in the first half of the year and massive flooding in the second have caused palm oil production in Thailand, the world's third largest palm oil producer, to drop to about 1.5 million tonnes in 2010, down from 1.8 million tonnes the year before. And with 70% of the country's cooking oil coming from palm oil, the shortfall has triggered a severe nationwide frying oil shortage never seen before.
 
Supply has been so tight that, according to an Agriculture Ministry report, the palm oil stock in the country last month was down to 70,000 tonnes, against the normal level of 120,000-130,000 tonnes.
 
The government had to allow importation from neighbouring Malaysia, where palm oil prices are much higher, to ease the crisis. And to alleviate the added costs to local crushers and manufacturers, the Ministry of Commerce had to set the new retail price of palm cooking oil at THB47 per one-litre bottle, about 28% higher than the previous price of THB38.
 
Instead of minimizing the problem, the price incentive, to the utter surprise of the government, had opened a Pandora's Box. Soon after, bottles of cooking oil made from soy were rapidly disappearing from retailer shelves. In a week's time, big retailers like Tesco-Lotus and Big C supermarkets were running out of soy cooking oil. Soybean and Rice Bran Oil Processors Association chairman, Vichit Vitayatanagorn, however, assures that there had not been any change in production quantity and deliveries from their side.
 
Traditionally, most consumers preferred palm cooking oil to soy cooking oil from a ratio of 3-to-1. Before the current shortage, 70% of consumers used palm cooking oil while only about 28% went for soyoil. But with soyoil still being sold at THB38 per one-litre bottle, against the THB47 for palm cooking oil, consumers would simply want to turn to what is cheaper.
 
Now, how would this shift in cooking oil preference affect Thailand's livestock and aquaculture industries?
 
To accommodate the higher need for soy cooking oil, retailers have increased their orders from suppliers by 20% in the past couple weeks, according to Watcharee Wimuktayon, director-general of the Thai Department of Internal Trade. In response, the country's four leading soyoil manufacturers have pledged to increase production by 20%-25 %.
 
Of course, this means that there is a newer and greater demand for soy.
 
Thailand relies largely on imports for its soy requirements.  Its local production, estimated at 180,000 tonnes this year, takes care of only about 10% of its consumption. Before the current cooking oil crisis, the country's soy demand this year was projected by the USDA at 1.98 million tonnes, an increase of about 9% from last year's 1.81 million tonnes. The USDA attributes the expected increase to ongoing expansions in the country's livestock and aquaculture sectors, along with a moderate rise in demand for soy-based food products.
 
However, with soyoil replacing palm-based cooking oil in the market, demand for imported soy could go up beyond what has been originally projected. In November last year, the Thai cabinet allowed unlimited in-quota importation of soy at zero tariffs, provided importers would buy domestic soy at government-determined prices.
 
Since things remain fluid, there are no available estimates from both the soy processors association and the Ministry of Commerce on how much more soy would be imported to make up for the palm oil shortage. Everything, of course, will depend on the import price of soy versus the import price of palm oil, and for how long could soy cooking oil stay cheaper than palm cooking oil. 
 
What is certain is that, with higher soy cooking oil production, domestic soymeal output will rise, which would be a good thing for the local livestock and aquaculture sectors. Soymeal is a waste product from soyoil processing. In fact, it accounts for 75%-77% of the total material after oil has been extracted.
 
As the main feed ingredient for its flourishing livestock and shrimp industries, Thailand's demand for soymeal this year is seen at 3.8 million tonnes, compared to last year's 3.66 million tonnes. Again, before the current cooking oil shortage, Thailand's own soymeal production for the year was estimated at only 1.25 million tonnes, more than 2.5 million tonnes short of its total requirements.
 
To fill up their need, feedmillers are allowed to import soymeal. But because of the 2% import tariff, imported soymeal has been a little more expensive than its local counterpart. For years, Thai feed producers have been asking the government to scrap the tariff, which used to be 4%. But the best the government could do was to slash it to half a few years back in the guise of helping local producers. It argued that totally eliminating the import tax would result in a flood of imports to the detriment of local soymeal producers.
 
At best, the government is being insincere. When Thailand negotiates free-trade deals with other countries, often the counter-argument it hears is that such FTAs could result in a flood of imports to the disadvantage of local producers. And, always, the government would shrug it off as baseless.
 
The truth is that the 2% tariff represents about THB500-THB600 million a year in revenue for the government, an amount that it will not easily give up.
 
Without the tariff, feedmillers said that they could bring feed prices down and help livestock and shrimp exports become more competitive in the world market, especially in the wake of a very strong baht, which has made Thai products more expensive than those of other countries.
 
With greater domestic soymeal production, feedmillers are practically getting their prayers answered. With increased local supply, imports can be minimised and tight competition is bound to happen. And with tight competition comes lower soymeal prices.
 
Now, will feed producers really bring down feed prices as they said they would?
 
 
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