Tuesday, January 22, 2008

[PBN] Global Oil Quandary: Costly Fuel means Costly Calories



A New, Global Oil Quandary: Costly Fuel Means Costly Calories
Justin Mott for The New York Times

Published: January 19, 2008

KUANTAN, Malaysia — Rising prices for cooking oil are forcing residents
of Asia's largest slum, in Mumbai, India, to ration every drop. Bakeries
in the United States are fretting over higher shortening costs. And here
in Malaysia, brand-new factories built to convert vegetable oil into
diesel sit idle, their owners unable to afford the raw material.

This is the other oil shock. From India to Indiana, shortages and
soaring prices for palm oil, soybean oil and many other types of
vegetable oils are the latest, most striking example of a developing
global problem: costly food.

The food price index of the Food and Agriculture Organization of the
United Nations, based on export prices for 60 internationally traded
foodstuffs, climbed 37 percent last year. That was on top of a 14
percent increase in 2006, and the trend has accelerated this winter.

In some poor countries, desperation is taking hold. Just in the last
week, protests have erupted in Pakistan over wheat shortages, and in
Indonesia over soybean shortages. Egypt has banned rice exports to keep
food at home, and China has put price controls on cooking oil, grain,
meat, milk and eggs.

According to the F.A.O., food riots have erupted in recent months in
Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen.

"The urban poor, the rural landless and small and marginal farmers stand
to lose," said He Changchui, the agency's chief representative for Asia
and the Pacific.

A startling change is unfolding in the world's food markets. Soaring
fuel prices have altered the equation for growing food and transporting
it across the globe. Huge demand for biofuels has created tension
between using land to produce fuel and using it for food.

A growing middle class in the developing world is demanding more
protein, from pork and hamburgers to chicken and ice cream. And all this
is happening even as global climate change may be starting to make it
harder to grow food in some of the places best equipped to do so, like

In the last few years, world demand for crops and meat has been rising
sharply. It remains an open question how and when the supply will catch
up. For the foreseeable future, that probably means higher prices at the
grocery store and fatter paychecks for farmers of major crops like corn,
wheat and soybeans.

There may be worse inflation to come. Food experts say steep increases
in commodity prices have not fully made their way to street stalls in
the developing world or supermarkets in the West.

Governments in many poor countries have tried to respond by stepping up
food subsidies, imposing or tightening price controls, restricting
exports and cutting food import duties.

These temporary measures are already breaking down. Across Southeast
Asia, for example, families have been hoarding palm oil. Smugglers have
been bidding up prices as they move the oil from more subsidized
markets, like Malaysia's, to less subsidized markets, like Singapore's.

No category of food prices has risen as quickly this winter as so-called
edible oils — with sometimes tragic results. When a Carrefour store in
Chongqing, China, announced a limited-time cooking oil promotion in
November, a stampede of would-be buyers left 3 people dead and 31 injured.

Cooking oil may seem a trifling expense in the West. But in the
developing world, cooking oil is an important source of calories and
represents one of the biggest cash outlays for poor families, which grow
much of their own food but have to buy oil in which to cook it.

Few crops illustrate the emerging problems in the global food chain as
well as palm oil, a vital commodity in much of the world and
particularly Asia. From jungles and street markets in Southeast Asia to
food companies in the United States and biodiesel factories in Europe,
soaring prices for the oil are drawing environmentalists, energy
companies, consumers, indigenous peoples and governments into
acrimonious disputes.

The oil palm is a stout-trunked tree with a spray of frilly fronds at
the top that make it look like an enormous sea anemone. The trees, with
their distinctive, star-like patterns of leaves, cover an eighth of the
entire land area of Malaysia and even greater acreage in nearby Indonesia.

An Efficient Producer

The palm is a highly efficient producer of vegetable oil, squeezed from
the tree's thick bunches of plum-size bright red fruit. An acre of oil
palms yields as much oil as eight acres of soybeans, the main rival for
oil palms; rapeseed, used to make canola oil, is a distant third. Among
major crops, only sugar cane comes close to rivaling oil palms in
calories of human food per acre.

Palm oil prices have jumped nearly 70 percent in the last year because
supply has grown slowly while demand has soared.

Farmers and plantation companies are responding to the higher prices,
clearing hundreds of thousands of acres of tropical forest to replant
with rows of oil palms. But an oil palm takes eight years to reach full
production. A drought last year in Indonesia and flooding in Peninsular
Malaysia helped constrain supply. Worldwide palm oil output climbed just
2.7 percent last year, to 42.1 million tons.

At the same time, palm oil demand is growing steeply for a variety of
reasons around the globe. They include shifting decisions among farmers
about what to plant, rising consumer demand in China and India for
edible oils, and Western subsidies for biofuel production.

American farmers have been planting more corn and less soy because
demand for corn-based ethanol has pushed up corn prices. American
soybean acreage plunged 19 percent last year, producing a drop in
soybean oil output and inventories.

Chinese farmers also cut back soybean acreage last year, as urban sprawl
covered prime farmland and the Chinese government provided more
incentives for grain.

Yet people in China are also consuming more oils. China not only was the
world's biggest palm oil importer last year, holding steady at 5.2
million tons in the first 11 months of the year, but it also doubled its
soybean oil imports to 2.9 million tons, forcing buyers elsewhere to
switch to palm oil.

Concerns about nutrition used to hurt palm oil sales, but they are now
starting to help. The oil was long regarded in the West as unhealthy,
but it has become an attractive option to replace the chemically altered
fats known as trans fats, which have lately come to be seen as the least
healthy of all fats.

New York City banned trans fats in frying at food service establishments
last summer and will ban them in bakery goods this summer. Across the
country, manufacturers are trying to replace trans fats. American palm
oil imports nearly doubled in the first 11 months of last year, rising
by 200,000 tons.

"Four years ago, when this whole no-trans issue started, we processed no
palm here," said Mark Weyland, a United States product manager for
Loders Croklaan, a Dutch company that supplies palm oil. "Now it's our
biggest seller."

Last year, conversion of palm oil into fuel was a fast-growing source of
demand, but in recent weeks, rising prices have thrown that business
into turmoil.

Here on Malaysia's eastern shore, a series of 45-foot-high green and
gray storage tanks connect to a labyrinth of yellow and silver pipes.
The gleaming new refinery has the capacity to turn 116,000 tons a year
of palm oil into 110,000 tons of a fuel called biodiesel, as well as
valuable byproducts like glycerin. Mission Biofuels, an Australian
company, finished the refinery last month and is working on an even
larger factory next door at the base of a jungle hillside.

But prices have spiked so much that the company cannot cover all its
costs and has idled the finished refinery while looking for a new
strategy, such as asking a biodiesel buyer to pay a price linked to palm
oil costs, and someday switching from palm oil to jatropha, a roadside weed.

"We took a view that palm oil prices were already high; we didn't think
they could go even higher, and then they did," said Nathan Mahalingam,
the company's managing director.

Growth in Biofuels

Biofuels accounted for almost half the increase in worldwide demand for
vegetable oils last year, and represented 7 percent of total consumption
of the oils, according to Oil World, a forecasting service in Hamburg,

The growth of biodiesel, which can be mixed with regular diesel, has
been controversial, not only because it competes with food uses of oil
but also because of environmental concerns. European conservation groups
have been warning that tropical forests are being leveled to make way
for oil palm plantations, destroying habitat for orangutans and Sumatran
rhinoceroses while also releasing greenhouse gases.

The European Union has moved to restrict imports of palm oil grown in
unsustainable ways. The measure has incensed the Malaysian palm oil
industry, which had plunged into biofuel production in part to satisfy
European demand.

Another controversy involves the treatment of indigenous peoples whose
lands have been seized by oil plantations. This has been a particular
issue on Borneo.

Anne B. Lasimbang, executive director of the Pacos Trust in the
Malaysian state of Sabah in northern Borneo, said that while some
indigenous people had benefited from selling palm oil that they grow
themselves, many had lost ancestral lands with little to show for it,
including lands that used to provide habitats for endangered orangutans.

"Finally, some of the pressures internationally have trickled down. Some
of the companies are more open to dialogue; they want to talk to
communities," said Ms. Lasimbang, a member of the Dusun indigenous
group. "On our side, we are still suspicious."

Demand Outstrips Supply

As the multiple conflicts and economic pressures associated with palm
oil play out in the global economy, the bottom line seems to be that the
world wants more of the oil than it can get.

Even in Malaysia, the center of the global palm oil industry for half a
century, spot shortages have cropped up. Recently, as wholesale prices
soared, cooking oil refiners complained of inadequate subsidies and cut
back production of household oil, sold at low, regulated prices.

Street vendors in the capital, Kuala Lumpur, complain that they cannot
find enough cooking oil to prepare roti canai, the flatbread that is the
national snack. "It's very difficult; it's hard to find," said one
vendor who gave only his first name, Palani, after admitting that he was
secretly buying cooking oil intended for households instead of paying
the much higher price for commercial use.

Many of the hardest-hit victims of rising food prices are in the vast
slums that surround cities in poorer Asian nations. The Kawle family in
Mumbai's sprawling Dharavi slum, a household of nine with just one
member working as a laborer for $60 a month, is coping with recent price
increases for palm oil.

The family has responded by eating fish once a week instead of twice,
seldom cooking vegetables and cutting its monthly rice consumption. Next
to go will be the weekly smidgen of lamb.

"If the prices go up again," said Janaron Kawle, the family patriarch,
"we'll cut the mutton to twice a month and use less oil."

Check for earlier Pacific Biofuel posts: http://pacbiofuel.blogspot.com/

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