Trade tension and impact on palm and soybean market GLOBOIL INDIA 2018 Mumbai, 27-28th September 2018 Dr. Sathia Varqa Palm Oil Analytics, Singapore sathia.varqa@palmoilanalytics.com

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Outline Key factors impacting palm market in 2018 Production Background to protectionist policies Type of trade barriers Impact on edible oils CPO, RBD palm olein Soybeans Conclusion & Year ahead 2019

DEPRECIATING CURRENCY Key factors impacting Palm market PRODUCTION Soybean – Brazil/US Palm oil - Indonesia TRADE TENSION Tariff barriers DEMAND High stocks Depreciating currency LOGISTICS Truck drivers strike in Brazil/fuel cost ENVIRONMENT Ban on veg oil based biofuels PRICE SUPPORT Minimum Support Price - India DEPRECIATING CURRENCY Emerging markets

Main problem Demand side to supply side problem Rising production Sluggish demand Soaring stocks Made worse by trade tension

Palm Oil Production

Global Production

Change in G4 Production

planted area exceed 5 year average

U.S still the largest producer

USDA Global Ending Stock Outlook

Palm Oil Exports

Change in production, export & stocks

2018 production estimate & 2019 projection Malaysia year-end stocks to reach 2.60 million tons Indonesia year-end stocks to surpass 5.50 million ton Collectively we could see stocks of over 8.0 million tons in Malaysia + Indonesia

CPO prices trended lower in 2018

Soybean oil prices fell the most from combination of bearish factors

Prices – Meal fell the least on lower Argentina Export in 2017-18

exports been dismal… 1. India imposed steep import tariffs on palm oil Soft oil import tariff difference to crude & refined palm is now 9% from previously 14% and 19% respectively

Why exports been dismal But… 2. High inventories – origin

Why exports been dismal 2. High inventories – destination

Why exports been dismal 3. Palm olein prices adjusted to lower soybean oil prices

Why exports been dismal 4. No significant increase in biodiesel despite CPO being cheaper than gasoil

Background to protectionist policies Welfare spending Redistribution of income Win elections Increasing income Fixation over economic growth Population growth Distributional conflicts Defense Jobs Poverty Education Infrastructure spending Investment Housing

Economic growth been the over-riding rationale for where we are today Background to protectionist policies Economic growth been the over-riding rationale for where we are today But growth can only happen on a steady path if there is a continued flow of capital, labour, technology and credit flow However if capital is low, then need to supplant it.

Protectionist policies Background to protectionist policies Growth Borrow Raise taxes Reduce spending Raise interest rate Issue government bonds Depreciate currency Reduce import dependency Raise import tariffs Debt Protectionist policies

Gross Debt position

General government debt as percentage of gdp

Countervailing duties Main Protectionist policies implemented – tariffs & taxes Import tariffs Anti-Dumping duties Export taxes Countervailing duties Import tariffs – a fixed fee or a percentage imposed on an imported product Anti-dumping duties –duties imposed on goods believed to be priced below fair market value Export taxes –duty levied on product leaving the country. Could be levy, tax on profit, etc. Countervailing duties –duties on import to neutralize the effects of subsidy also known as anti-subsidy duties

China: 28% import tariff on US soybeans Some protectionist measures on Soybeans & palm oil around the world China: 28% import tariff on US soybeans Argentina: 15% export tax on biodiesel Argentina: 18% tax + 4 Peso to 1 USD on SB U.S: 341.38% on Indonesia biodiesel imports U.S: 159% on Argentina biodiesel imports India: 35% on crude and 45% on refined soft oils imports EU: Anti-subsidy investigation on Argentina SME biodiesel imports

Impact : Tariffs Displaced 370K tons of Malaysia CPO & Olein export to India

Impact: Palm oil import fell the most from the tariff increase Impact: Palm oil import fell the most from the tariff increase. SFO gained the most share Total edible oil imports expected to rise to 15.40 million tons from 14.40 million in 2018-19 Palm oil imports likely to rise to 9.30 million tons from 8.50 million in 2018-19

Impact: India CPO import jumped sharply in Aug on lower prices and stocks

Impact: Fall in rupiah by 9. 30% helped to keep cpo prices down by 15

Impact: Malaysia zero Cpo export tax

Impact : Soybean prices fell 19% in the last 5 months on high tariffs from china

Impact : U. S soybean export to china fell 8 Impact : U.S soybean export to china fell 8.50 million tons from the previous marketing year

U.S soybean exports to China Source: Bloomberg Intelligence Report

Impact: China tariff on U.S soybean

Conclusion Production - strong palm and soybean production rise is frustrated by trade barriers Protectionist policies are depressing demand – leading to rise in stocks Prices are becoming more sensitive to noise on ‘trade talks’ than on actual S&D

2019 - Year ahead Price: Benchmark CPO Futures supported RM 2150 to 2250 to Oct but higher RM 2250-2350 from Dec to Q1 2019. India: Will India import tariffs be revised ? Biodiesel: Will Malaysia increase biodiesel mandate ? China – US trade tension plays out. Impact on SB, SBO demand & PO prices China E10 mandate by 2020

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