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

2. 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.

3. 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

4. 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 #529\SBO Use Trends\US Oil Dom Consumption.xlsx / psd
* Includes coconut, cottonseed, olive, peanut and sunflowerseed
Source: USDA/FAS PS&D

5. 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

6. 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 (RG edits).xlsx

7. 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 #529\PO SBO Substitution\Analysis\PO Demand Data Summary xlsx / FAS Oil use data
Source: USDA/FAS PS&D

8. 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 #529\PO SBO Substitution\Analysis\PO Demand Data Summary xlsx / FAS Oil use data
Source: USDA/FAS PS&D

9. 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

10. 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

11. 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

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

13. 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

14. 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

15. 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

16. 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??

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