Food Inflation Rising as Cooking Oil to Catch Grain

Cooking oils, left behind in this year’s surge in agriculture prices, are poised to catch up with grains as record demand cuts stockpiles by the most in 17 years.

Inventories of soybean oil and palm oil, used by Nestle SA and Unilever and in everything from Hellmann’s mayonnaise to Snickers candy bars, will drop 12 percent in the coming year as China and India increase consumption 11 percent, U.S. Department of Agriculture data show. Food prices climbed in September to the highest level since the crisis in 2008 that sparked riots from Haiti to Egypt, the United Nations says.

“China’s economy is growing and there’s no reason why the country will take any less food next week, next month, or next year,” said Steve Nicholson, a commodity procurement specialist at International Food Products Corp., a distributor and adviser on food ingredients in Fenton, Missouri. “We’ve been able to produce more food in the past 2,000 years, but can we do it fast enough to meet the demand from China and other emerging economies to stave off a crisis?”

Increasing wealth in Brazil, India and China is boosting demand for grains, dairy, meat and cooking oils. While Sime Darby Bhd., the world’s biggest listed palm-oil producer, is benefiting from rising prices, governments from Beijing to New Delhi are trying to curb food inflation by raising imports, limiting exports or selling stockpiles. Per-capita use of vegetable oils in China has more than doubled in a decade, said Bill Nelson, a senior economist at Doane Advisory Services Co., an agricultural research and advisory company in St. Louis.

Farm Costs Soar

The Standard & Poor’s GSCI Agriculture Index of eight futures climbed 30 percent this year, led by corn, wheat, coffee and cotton, as floods in Canada, Pakistan and China and drought in Russia and across Europe killed crops. The economies of China and India, the biggest consumers of cooking oils, are growing at three times the speed of the U.S.

Water scarcity, increasing global temperatures and the potential for dry weather may threaten farm production, said Nomura Holdings Inc. economists and strategists including Robert Subbaraman in a report dated Sept. 8. About 1.8 billion people will live in countries or regions with absolute water scarcity by 2025, according to the UN Food & Agriculture Organization.

The CRB/Reuters U.S. Spot Raw Industrials index, a gauge of 22 commodities including butter and soybean oil, rose to an all- time high on Oct. 25. Meat prices advanced to a two-decade high in August, according to a UN index.

Food Demand

Record demand for food and biofuel may combine with delays to planting in South America to extend gains in cooking oils, said Murali Krishna P.V., chief executive officer of TransGraph Consulting Pvt., an adviser to Bunge Ltd. and Cadbury Plc.

Palm oil traded on the Malaysia Derivatives Exchange may rise 18 percent to 3,600 ringgit ($1,161) a metric ton by March, extending this year’s 15 percent advance, said Murali, based on the Oct. 29 close. Soybean oil traded on the Chicago Board of Trade may gain 16 percent to 57 cents a pound, adding to this year’s 21 percent rally, he said in an interview from Hyderabad, India. Palm oil advanced 1 percent today to end at 3,092 ringgit per ton, the highest finish since July 2008.

“The critical period of tightness is yet to come,” said Dorab Mistry, a director at Godrej International Ltd. who has traded cooking oils for more than three decades and who correctly predicted the gains in palm oil and soybean prices since June. “We’re not doing enough to raise production of vegetable oils and the weather the world over is troublesome.”

A lack of rain in the center-west of Brazil is delaying planting in a region that grows 47 percent of the country’s soybean output, the world’s second-largest crop behind the U.S.

Brazilian Planting

Farmers in Mato Grosso state planted 16.4 percent of the planned area as of Oct. 21, compared with 36.8 percent a year ago, farm research institute IMEA said Oct. 22. Plantings in the other center-west areas of Goias and Mato Grosso do Sul also lagged behind plan, said Marco Antonio dos Santos, a forecaster at Sao Paulo-based Somar Meteorologia Ltda.

Investor demand also explains the jump in prices, and poses a risk to further rallies. Low interest rates and a weaker dollar are encouraging some investors to buy commodities, said Atul Chaturvedi, chief executive at Adani Wilmar Ltd., India’s second-biggest cooking-oil importer.

The U.S. Federal Reserve has kept its benchmark interest- rate near zero since December 2008 and the U.S. Dollar Index, a gauge against six counterparts, slumped 8.5 percent in the third quarter. Commodity assets in exchange-traded products, medium- term notes and funds linked to indexes rose 9 percent to a record $320 billion in September, according to Barclays Capital.

Money Supply

“If the governments wake up and start contracting the money supply by raising interest rates, which China has done, commodities will lose some of their sheen,” Chaturvedi said.

Rains in Brazil and Argentina, the world’s second and third-biggest soybean producers, would help crops, potentially increasing supply. Farmers in Argentina planted 13.5 percent of the planned crop area, compared with 5.5 percent a year earlier, the Buenos Aires Cereals Exchange said Oct. 28.

Government intervention may also damp prices. Consumer inflation in China rose 3.6 percent in September, the most in almost two years, driven by an 8 percent increase in food costs. The government auctioned 300,000 tons of rapeseed oil from stockpiles on Oct. 20 and the State Council said a week later that hoarders would be “severely” punished.

While the UN’s Food Price Index rose 23 percent in the 12 months ending in September, it’s still about 12 percent below the 2008 peak. Food security is of less concern now than in the last several years because grains stocks are bigger and a weakened global economy will stunt demand, Abdolreza Abbassian, a senior economist at the UN FAO, said last month.

Oil-Palm Tree

Palm oil, extracted from the fruit of the oil-palm tree, has grown in popularity because of increasing concern about trans fats, according to the USDA. Soybean oil, accounting for about a fifth of the weight of a soybean, was the world’s largest source of vegetable oil until about 2005, when it was overtaken by palm oil, the USDA says.

Biofuels are also boosting demand for vegetable oil. Biodiesel output will climb to 18 million tons this year, five times the 3.5 million tons produced in 2005, said Claus Keller, a commodity analyst at F.O. Licht in Ratzeburg, Germany.

China, the world’s biggest soybean importer, may buy a record 60 million tons in 2010-2011, according to unidentified global grain trading companies cited by the China National Grain & Oils Information Center, owned by the state body which manages the country’s food supply and logistics.

Oil Inventories

Inventories of palm oil and soybean oil, the two most used oils, will fall to a total of 6.72 million tons by the end of the 2010-2011 marketing year from 7.64 million a year before, the biggest percentage drop since 1993-1994, USDA data show.

China’s vegetable oils consumption has more than doubled to 22.4 kilograms per capita in the past decade and may reach 28.4 kilograms in five years, said Nelson from Doane Advisory Services. That compares with 39 kilograms in the U.S., he said.

“China just keeps taking soybeans and vegetable oils,” said Nicholson from International Food Products. “It’s more than a little scary how insatiable their appetite is.”

To contact the reporter on this story: Claire Leow in Singapore at cleow@bloomberg.net; Thomas Kutty Abraham in Mumbai at tabraham4@bloomberg.net; Jeff Wilson in Chicago at jwilson29@bloomberg.net.

To contact the editor responsible for this story: James Poole at jpoole4@Bloomberg.net.

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