U.S. Demand for Palm Oil Presented at Sustainability & Land Use Change Workshop 27 September 2018 Sharon Bard Centrec Consulting Group

Background Motivation: Objectives: Increased use of palm oil in the U.S. has often been attributed to the expansion of U.S. biodiesel production Vegetable oil, particularly palm oil, consumption in the United States is often misunderstood, and that misunderstanding is often reflected in the researchers’ analytical approach Objectives: To provide background information on palm oil and its use in the United States to key stakeholders To evaluate the factors impacting palm oil demand in the U.S.

U.S. Vegetable Oil Edible Use: Demand Factors Specific application or end product for which the vegetable oil is intended Primary - Baking and frying Lesser applications include cooking and sautéing; salad dressings, bottle oils and mayonnaise; and margarines and other miscellaneous uses Functional needs (how the vegetable oil is used for the application or end product) Chemical and physical properties Other factors including long-term expectations of availability and price trends; short-term availability and price; firm size and market power; and health concerns, influence groups and regulatory issues and laws

U.S. Vegetable Oil Disappearance Trans Fat Labeling Great Recession PHO Ban Health concerns about partially hydrogenated vegetable oils (PHO) resulting in U.S. regulations have lead to The inclusion of trans fats on food product labels; the regulation went into effect in 2006 Food companies beginning to replace PHOs (primarily PH soybean oil) with either vegetable oils in different forms (such as interesterified and fully hydrogenated soybean oil) or or different types of vegetable oils such as palm oil FDA announcing in 2015 that PHO in food products would be banned, effective in 2018 Food companies completely replacing PHOs with substitutes by 2018 File Source for Chart: M:\Clients\NBB\NBB Sustainability Awareness 2018--#529\SBO Use Trends\US Oil Dom Consumption.xlsx / psd * Includes coconut, cottonseed, olive, peanut and sunflowerseed Source: USDA/FAS PS&D

Refining & Distillation Palm Oil Processing Refining & Distillation Crude Palm Oil Refining Interesterification Palm Fatty Acid Distillates IE Palm Glycerolysis Oleochemicals RBD Palm Oil Emulsifier Fractionation Hydrogenation Hydrogenated Palm Oil 20% 80% RBD Palm Stearin RBD Palm Olein

Non-fractionated Palm Oil Palm Oil Types and Uses   Palm Non-fractionated Palm Oil Palm Olein Palm Stearin Edible Uses Veg oil shortenings, biscuit fats, bakery fats, margarines, and foodservice frying oils Frying oil of choice globally, except in the US (clouds in the bottle); snack food manufacturing Hardstock fraction for liquid oil blends in shortening, pastry, bakery and margarines Inedible Uses Biodiesel, fatty acids, oleochemicals, amines Not used much for inedible purposes; if used, it is used for personal care or oleochemical products May replace tallow in select industrial use; replacement depends on price and fatty acid splitting yield; used in soap manufacturing Palm oil has physical and chemical properties that makes its use suitable for targeted applications, such as shortening and frying purposes Source: M:\Clients\NBB\NBB EEE New--#453\Oil Properties\Copy of Oil Properties Summary 150427 (RG edits).xlsx

Palm Oil Use in the United States Trans Fat Labeling Great Recession PHO Ban PO imports – almost all PO imports are RBD oil in various forms – PO, stearin and olein; import data report them in single category Used primarily for edible uses Industrial use – little to no PO reported for BD use Industrial use – used primarily for oleochemicals, amines &/or soaps Mid-1980s – push to stay away from tropical oils due to saturated fats 2003 or 2004 shortly after TF labeling requirements were announced 2006 when the TF labeling went into effect 2007 / 2008 – Great Recession MY14/15 – a significant drop in PO imports occurred because of overly aggressive imports in MY13/14 which led to large stocks that had to be drawn down in MY14/15 2015 – PHO ban was announced Chart source: M:\Clients\NBB\NBB Sustainability Awareness 2018--#529\PO SBO Substitution\Analysis\PO Demand Data Summary 180912.xlsx / FAS Oil use data Source: USDA/FAS PS&D

Palm Oil as a Substitute Pre-Trans Fat Labeling PHO, primarily PH SBO Post-Trans Fat Labeling / PHO Transition Non-F PO: liquid SBO &/or fully hydrogenated / EIE SBO blend Palm olein: High oleic SBO; canola oil Palm stearin: liquid SBO &/or fully hydrogenated / EIE SBO blend Various forms of palm oil have served as substitutes for the following VOs Chart source: M:\Clients\NBB\NBB Sustainability Awareness 2018--#529\PO SBO Substitution\Analysis\PO Demand Data Summary 180912.xlsx / FAS Oil use data Source: USDA/FAS PS&D

Previous Research Numerous economic studies have been conducted over the years about the relationships of vegetable oils Review of literature found that: Majority of the research treated vegetable oils as end products, not intermediate goods Most only looked at price relationships and excluded other demand factors that most likely impact import demand of an intermediate good such as palm oil Some incorrectly made a direct link between palm oil imports and soybean oil use for biodiesel No studies were found that considered the impact of the trans fat labeling and PHO ban regulations on U.S. demand for vegetable oils accounted for the edible and inedible markets which have different demand drivers / elasticities

What is Known about Palm Oil Use Demand drivers: Functionality Chemical / physical properties limit substitutability Health concerns and regulations (which appear to have been significant demand drivers in recent years) Reformulation of ingredients takes time Purchase decisions are generally made 3 to 6 months in advance of use Used almost exclusively as an intermediate good, not as an end-product, primarily for human consumption Is an imported vegetable oil, thus may be subject to trade-related issues such as exchange rates Vegetable oil prices are highly correlated implying relative price differences are fairly constant

Vegetable Oil Price Relationships Granger causality A variable X is causal to variable Y if X is the cause of Y or Y is the cause of X This is not a test for a true cause-and-effect relationship Indicates if a particular variable comes before another in the time series. Previous research has tested for Granger causality between vegetable oil prices and had mixed results Tested for Granger causality between soybean oil and palm oil prices and canola oil and palm oil prices

Vegetable Oil Price Relationships Granger causality was found in both directions between the oils

Gaps in Knowledge How has the change in demand for vegetable oils in the U.S. due to health concerns and regulations impacted the demand for U.S. palm oil imports? Factors to consider: Timing of procurement decisions for palm oil; they aren’t made on an annual basis Palm oil is an intermediate product, not an end-product Substitutes – soybean oil; canola oil Structural change of PHO and trans fat labeling Seasonality? Trend in palm oil use in the United States

Evaluating U.S. Import Demand for Palm Oil: Simple Approach Analyzing import demand of palm oil viewed as an intermediate good Single import demand equation: U.S. is considered to be a price taker; small share of global use of palm oil Dependent variable: monthly palm oil imports (per capita) Factors hypothesized to U.S. import demand for palm oil Palm oil price - lagged Lagged prices of substitute – soybean oil (considered canola oil but not included) Lagged imports to account for adjustments in revenue/income and relative prices over time Overall demand for food – Gross Domestic Product (per capita) Structural change to account for changing demand for PHO, beginning in January 2006 Trend and seasonality Considered Personal Consumption Expenditure for Nondurable Goods

Evaluating U.S. Import Demand for Palm Oil: Simple Approach Double log function is used to estimate the U.S. import demand for palm oil The coefficients of variables also represent elasticities Data Monthly U.S. imports of palm oil (per capita) Monthly U.S. (Gulf) prices of the vegetable oils (implicitly accounting for exchange rates for imported oils) (lagged) – RBD palm oil; RBD soybean oil Edible Demand factor – Monthly Gross Domestic Product (per capita) (Census Bureau) Lagged imports to account for adjustments in revenue/income and relative prices over time Time period: January 2004 – May 2018 Considered Personal Consumption Expenditure for Nondurable Goods

Evaluating U.S. Import Demand for Palm Oil: Simple Approach - Preliminary results Reasonable fit Palm oil imports are impacted by Palm prices - negative Soybean oil prices- positive Domestic demand - positive Structural change starting in January 2006 – positive Possible next steps: Consider separating industrial from edible demand Other suggestions??

Questions / Suggestions for further exploration? Thank you! Sharon Bard