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Dhaka Tribune

Explainer: Why edible oil price is skyrocketing

How long high prices will persist depends much on how quickly peace returns to Ukraine

Update : 10 May 2022, 11:20 AM

The price of bottled soybean oil in Bangladesh has reached a record high of Tk198 per liter, stirring anger and dissatisfaction at the mass consumer level as the price was increased several times before the beginning of Ramadan as part of a tradition to bag extra profits. In the current volatile state of the oil market, low- and middle-income people are facing unbearable sufferings.

However, there are more factors behind the rise in the price of this essential oil in the country.

La Nina impacts 50% of world’s supply

Soybean oil in Bangladesh is mainly imported from Brazil and Argentina. The global production of the soybean crop has been shrinking, led by a massive fall in Latin America.

Last summer, the United States Department of Agriculture (USDA) was expecting the combined 2021-22 soybean crop in Brazil, Argentina, and Paraguay to be a record. Now the forecast shows the smallest output of the crop since 2018-19

Since December 2021, the USDA has lowered expected soybean production in the three countries by more than 18 million tons, with Brazil, Argentina and Paraguay seeing falls by 7%, 9%, and 37%, respectively.

The three nations account for more than 50% of the world’s soybean supply. If these production shortfalls are realized, the USDA says global soybean trade could be significantly constricted.

The losses in Brazil, the world’s largest soybean producer and exporter, are concentrated mainly in the southern states, such as Rio Grande do Sul, Paraná and Mato Grosso do Sul — where La Nina causes droughts during the summer.

Meanwhile, Argentina is the world’s top soybean oil and soybean meal exporter. Nearly the entire country has been suffering from a drought since November, again as a result of La Nina.

On March 13, Argentina restricted exports of soybean oil and soybean meal, and later altered course on March 31, permitting exports but raising export taxes on those products from 31% to 33%.

In Paraguay, the world’s fourth-largest soybean exporter, the situation is even more dramatic. Paraguay’s soybean harvest could fall by as much as 50%, to some 165 million bushels in what would be its lowest level in the last decade.

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Freight cost

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For a glimpse of how quickly and unevenly economies are recovering from the pandemic, look no further than the market for shipping raw materials.

Rising demand for everything from soybeans to steel has sent the cost of hauling dry goods soaring by more than 50% in 2021.

In October last year, the Bloomberg Commodity Index (BCOM), a financial benchmark designed to provide diversified exposure to physical commodities via futures contracts, peaked at $105.8, a six-year high. On the other hand, the index averaged close to $80 throughout 2019.

China hoards over half the world's grain

Less than 20% of the world's population has managed to stockpile more than half of the globe’s soybean and other grains, causing steep price increases, and pushing more countries into famine. The food price index, calculated by the Food and Agriculture Organization in November, stood about 30% higher than that recorded a year ago.

The hoarding is taking place in China. A major Chinese state-owned food processor runs one of the country's largest food stockpiling bases in its northeastern part.

China is maintaining its food stockpiles at a “historically high level,” Qin Yuyun, head of grain reserves at China’s National Food and Strategic Reserves Administration, told reporters last November.

According to the USDA, over the past five years, China's soybean imports soared two- to twelve- fold on aggressive purchases from the US, Brazil and other supplier nations.

“Hoarding by China is one reason for rising prices,” said Akio Shibata, president of the Natural Resource Research Institute in Tochigi Prefecture, Tokyo.

Indonesia bans palm oil export

In Bangladesh, a very obvious way to replace soybean oil would be the use of liquid oils such as rapeseed oil, sunflower oil or palm oil.

But Indonesia – the world’s biggest edible oils exporter – imposed an export ban that includes crude palm oil, adding to uncertainty in a market that has suffered dizzying price swings, and threatening to worsen global food inflation.

The ban was expanded to crude palm oil, RBD (refined, bleached, and deodorized) palm oil, and used cooking oil. The policy was initiated on April 28.

How long that ban will remain in place is still unclear, but the restrictions will further compound the import needs of other countries, such as Bangladesh, since the country depends heavily on imported palm oil to meet its ever-mounting consumption needs.

The move by Indonesia, which accounts for a third of global edible oil exports, adds to a raft of crop protectionism around the world ever since the Ukraine war.

Sunflower oil ‘vanishes’

The Black Sea countries are large exporters of sunflower oil, and the Ukraine war has pushed vegetable oil prices significantly higher, and also triggered trade policy responses around the world that further restrict supplies and raise prices.

Sunflower oil has been most directly affected, with a price increase of more than 40% since February 24. 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 globally.

Since vegetable oils require little or no processing, high prices have already been passed through to consumers, and some retail shortages have been reported.

Together, palm oil (58%), soybean oil (14%), sunflower oil (13%), and rapeseed (canola) oil (7%) accounted 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 in the period 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.

Trade restrictions imposed by major vegetable oil exporters have increased price volatility and with it, the vulnerability of food-insecure households around the world.

How long the high prices persist will depend much on how quickly peace returns to Ukraine and when its agricultural economy starts to recover.

Under the best of circumstances, however, the prices are likely to remain high throughout this year and into 2023.

A survey of the US planting intentions suggests that the US farmers intend to plant a record level of soybean area this year while early indications suggest that South American soybean production and EU rapeseed production could rebound as well.

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