Palm Oil Advancing 23% Hurting Unilever as Stockpiles Decline to 1974 Low

At a time when consumers are focused on food costs that are within about 3 percent of a record, stockpiles of edible oils needed to make everything from noodles to fish sticks are dropping to a three-decade low.

The combined stocks of nine oils will plunge 25 percent to 9.39 million metric tons this year, or about 23 days of demand, the fewest since 1974, the U.S. Department of Agriculture estimates. Palm oil prices will climb as much as 23 percent to 4,000 ringgit ($1,324) a ton by Dec. 31, based on the median in a Bloomberg survey of 11 analysts and traders.

As the global population expanded 85 percent in the past four decades, demand for edible oils rose almost ninefold. While that’s raising costs for Unilever, the second-largest consumer goods company, it will also help Sime Darby Bhd., the biggest publicly traded palm-oil producer, report a fourfold gain in earnings this year, analysts’ estimates compiled by Bloomberg show. The forecast price rally, which may quicken should flooding return to plantations, will stoke inflation that caused central banks from Brazil to China to raise interest rates.

“The world cannot afford any crop problem this year, anywhere,” said Steve Nicholson, a commodity procurement specialist at International Food Products Corp., a distributor and adviser on food ingredients in Fenton, Missouri. “Without a cushion of inventories, any production hiccup in the northern hemisphere this year will be catastrophic and leave today’s prices looking cheap.”

Food Costs

Vegetable oils have been left behind in this year’s surge in food costs, which the United Nations says rose to a record in February. Palm oil, the most-used, fell 14 percent to 3,260 ringgit this year on the Malaysia Derivatives Exchange and soybean oil, the second most-consumed, declined 1.5 percent to 57.49 cents a pound on the Chicago Board of Trade. Corn jumped 19 percent, hogs 27 percent and milk 27 percent. The Standard & Poor’s GSCI Index of 24 commodities rose 17 percent.

Even after this year’s drop, palm oil is 67 percent higher than its 10-year average, helping explain why Kuala Lumpur Kepong Bhd. (KLK), which managed about 446,000 acres of plantations last year, will report a 35 percent increase in profit this year, according to analysts’ estimates compiled by Bloomberg.

Unilever, based in London and Rotterdam, said in February that edible oils were one of the main contributors to higher commodity costs in 2010. The trend will accelerate this year, Chief Financial Officer Jean-Marc Huet said in a Feb. 3 conference call. Procter & Gamble Co., based in Cincinnati, is the world’s largest consumer goods company.

Global Stockpiles

Stockpiles of the oils extracted from palm fruit, palm kernel, soy, rapeseed, sunflowers, coconuts, cotton, olives and peanuts are slumping as demand climbs 6.1 percent to a record 146.4 million tons this year, outpacing a 4.2 percent gain in production, according to USDA estimates. Vegetable oils are used in everything from Hellmann’s mayonnaise to Snickers candy bars, as well as soaps, cosmetics and fuels.

Consumption in China, the biggest user, more than doubled to 29.4 million tons in a decade as urban incomes tripled, spurring demand for processed foods.

Global retail sales of packaged food will reach $2.18 trillion this year, from $1.65 trillion in 2005, according to London-based Euromonitor International Ltd., a consumer research company. Shoppers will also spend about $500 billion on chilled, dried or frozen processed foods, Euromonitor estimates.

Supply failed to meet demand as flooding in Indonesia and Malaysia, the top producers, curbed palm harvesting this year, while floods or drought in Canada, Europe, Russia and in Ukraine in 2010 cut the supply of rapeseed and sunflower seed. Malaysian palm-oil output fell 14 percent to 1.06 million tons in January, the lowest since 2007, according to the Malaysian Palm Oil Board.

Economic Growth

Demand may weaken should prices advance or economic growth slow. Brazil’s inflation accelerated to 6.3 percent in March, its fastest pace in 28 months. The central bank has a goal of 4.5 percent, plus or minus 2 percentage points.

Consumer prices in China increased 5.4 percent in March, the most since 2008, after Premier Wen Jiabao set this year’s target at no more than 4 percent. The country increased banks’ reserve requirements from April 21, and will continue to tighten monetary policy for “some time,” according to central bank Governor Zhou Xiaochuan.

The U.S. will grow 2.8 percent this year, down from a January forecast of 3 percent, the International Monetary Fund said April 11.

Malaysian Report

Signs that supply may exceed current forecasts may also mean lower prices. Palm oil fell 4.8 percent last week after the Malaysian Palm Oil Board reported a 29 percent rebound in March output. Figures for the previous two months were the smallest in about four years. Palm oil may drop as low as 2,884 ringgit, according to the median of estimates in the Bloomberg survey of 10 analysts and traders, taken after the Malaysian report.

Indonesian output may climb about 11 percent to 25 million tons this year, more than the 7.3 percent anticipated by the USDA, according to Dorab Mistry, a director at Godrej International Ltd. who has traded edible oils for three decades. He expects prices to drop below 3,000 ringgit before rebounding to 4,000 ringgit as the highest crude prices since 2008 spur demand for biodiesel from soybean oil.

Global biodiesel output, mostly made from vegetable oils, may climb to about 18 million tons this year from 17 million in 2010, or five times the 3.5 million tons produced in 2005, according to Claus Keller, a senior commodity analyst at F.O. Licht in Ratzeburg, Germany.

Fuel Producers

That anticipated demand for soybeans by fuel producers may not be met by U.S. farmers, who told the government last month they intend to cut acres planted with the oilseed by 1 percent this year, the USDA said March 31. Chinese growers may plant 11 percent fewer acres, seeking greater profit from cotton and corn, the agriculture ministry said in a report March 16. Prices for both crops more than doubled in the past year.

Soybean plantings in the U.S. may be as many as 2 million acres below the USDA’s estimate because other crop prices kept surging since the survey, according to Douglas Carper, the principal of Omaha, Nebraska-based DEC Capital Inc., a commodity trading adviser and hedge-fund consultant. The USDA has overestimated soy plantings in five of the past seven years.

Soybean oil will gain 13 percent to 65 cents a pound by the end of the year, according to the median estimate in a Bloomberg survey of seven analysts. Hedge funds increased their bets on higher prices in soybean-oil futures by 25 percent in the week to April 5, U.S. Commodity Futures Trading Commission data show.

Food Index

This year’s drop in palm contributed to a 7 percent decline for oils included in the UN’s World Food Index last month, with the overall gauge retreating about 3 percent from the record reached in February. World Bank President Robert Zoellick says the global economy is “one shock away” from a crisis in food supplies and estimates that 44 million people have fallen into poverty because of rising food prices in the past year.

While higher prices may be hurting food companies and consumers, they’re bolstering income for growers.

Sime Darby will report earnings per share of 55 sen (18 cents) in its fiscal year ending in June, compared with 12 sen a year earlier, according to the mean of 26 analysts’ estimates compiled by Bloomberg. Plantations accounted for 33 percent of the Kuala Lumpur-based company’s revenue last year. Kuala Lumpur Kepong, based in Perak, Malaysia, will make 1.28 ringgit a share, from 95 sen, the estimates show. The company got 47 percent of its revenue from plantations in the last financial year.

Costlier vegetable oil will also improve the lives of farmers in Indonesia, where 38 percent of the workforce depends on agriculture, according to the CIA World Factbook.

“We’ve seen major improvements in farmers’ lives as they build homes and buy new cars and motorcycles,” said Asmar Arsjad, secretary general of the Indonesia Palm Oil Farmers Association, in Jakarta. Farmers “are not only building houses for themselves but for their sisters, brothers and parents.”

To contact the reporters on this story: Ranjeetha Pakiam in Kuala Lumpur at rpaskiam@bloomberg.net; Luzi Ann Javier in Singapore at ljavier@bloomberg.net; Jeff Wilson in Chicago at jwilson29@bloomberg.net.

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net; Steve Stroth at sstroth@bloomberg.net.

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