More palm oil production expected in Latin America

In response to global concern about the loss of tropical rainforests, Malaysia has promised to limit its palm plantations to a total of 6 million hectares. Malaysia will also work to certify all domestic production as sustainable by the end of 2019.

Now that Malaysian palm oil companies are limited in domestic expansion opportunities, some refiners are searching for acquisitions in Central and South America. For example, Bloomberg reports that Sime Darby Plantation hopes to purchase Latin American assets and therefore improve its margins by producing palm oil closer to the European and North American markets. Colombia may offer the best near-term prospects as it is already the top Latin American producer at over 1.6 million metric tons per year. Honduras, Ecuador, and Brazil also produce palm oil, and together produce about as much as does Colombia.

The European Union uses around 6.7 million metric tons of palm oil each year, split 55-45 between industrial and food uses. While Europe has restricted the future use of palm oil in biodiesel production, the tropical oil is still in high demand for food applications and other industrial uses, such as soap and detergent.

Palm oil utilization in the U.S. is about one-fourth the EU’s volume, and the food industry accounts for almost 80 percent of total use. Use has grown about 25 percent over the last five years. The price of substitutable soybean oil directs the price of palm oil in the U.S. market, which has pressured palm oil refiner profitability for some time, and a decrease in transportation costs would be a welcome boost to refiner margins.