countries which consume domestically almost all the palm oil produced; and d) Oil palms are particularly suited as primary crops in smallholder settlement projects, which benefit large numbers of rural families. Thus, these projects are a way of helping the rural poor.

PALM OIL: PUBLIC ISSUES

I. BACKGROUND

1. Prices for soybean oil in international markets dropped sharply during 1975. The following table illustrates the weakening of the markets for soybean oil and soybeans during this year. The table also shows that prices for soybean meal remained stable thereby cushioning the pressure on soybean markets.1

MONTHLY PRICES FOR SOYBEANS AND THEIR PRODUCTS IN INTERNATIONAL MARKETS, 1975

2. The decline in prices for soybean oil affected primarily the profitability of the soybean industry; it lowered the crushing margins (the difference between the combined value of oil and meal extracted from soybeans and the price of soybeans) of soybean processors and prices offered to soybean farmers. Prices for soybeans and their products were at record levels in 1974 (remember U.S. $10 a bushel for soybeans), at a time when the world experienced a food scarcity. Even now, prices for these commodities are well above their average during the 60's (see Table 1 in Annex 1, page 31).

3. Prices for palm oil followed the drop in soybean oil prices during 1975. As it is generally priced below soybean oil there is an incentive to substitute palm oil for the slightly more expensive soybean oil. U.S. imports of palm oil reflect this. During 1975 the United States imported 436,000 tons of palm oil, which represents an increase of 133 percent of her 1974 palm oil imports.

4. The dramatic increase in U.S. palm oil imports and the somewhat bleak economic situation in the U.S. soybean economy sparked a study by the U.S. Department of Agriculture. A report of the study was released in January 1976 under the title Palm Oil Historical Perspective and Future Prospects. The main findings of this report surfaced a few days later in the U.S. press. The following are two examples:

(a) Dan Morgan in the Washington Post (February 1, 1976) says that "A sharp increase in the volume of palm oil imported into the U.S. has caused the U.S. Agriculture Department to recommend that the Government reverse a long-standing policy of helping poor countries plant palm trees and build processing plants ... The Department warned that duty-free imports of the relatively cheap palm oil will severely hurt U.S. soybean cotton farmers." The Washington Post adds that "A Treasury Department official said the Government would look with 'skepticism' on and new requests (or assistance) pending the completion of an Agriculture Department study of the impact of the global oil boom".

(b) The Journal of Commerce (February 2, 1976) carried a Commodity News Service story saying that "State and Treasury Department sources

1 Soybeans contain about 17 percent oil and 80 percent high protein meal. Soybean meal is a major component in livestock feeds; soybean oil is used mainly in the manufacture of cooking oils, margerine, shortening, and various non-food products. Both commodities are recovered simultaneously in the extraction process. Their combined value (minus the cost of extraction) determines the price of soybeans (Table 1, Annex).

confirm that their commodity experts are looking at the question of palm oil imports, including the possibility of ending or limiting U.S. aid programs that help foreign palm oil producers." According to this report, the experts "who make interagency food policy are examining U.S. bilateral aid programs that help foreign palm oil producers and the position the U.S. should take on international agency programs that do the same thing".

5. The study blames palm oil for the decline in soybean oil prices. It overlooks the fact that the United States had harvested 41.3 million metric tons of soybeans in 1975. This was the second largest crop after the 1973 record crop of 42.1 million tons.1 This is equivalent to more than 7 million metric tons of soybean oil. The following table illustrates the increase of soybean production during 1975.

The table shows that the U.S. had increased its soybean production by 6.5 million tons. This added more than 1.1 million tons of soybean oil to the supply of other fats and oils. Worldwide, soybean production in 1975 added about 1.6 million tons of oil. In comparison, the world production of palm oil has only increased by about 285,000 tons. World exports of soybean oil were estimated (by FAO) to increase by 1.4 million tons; the corresponding increase for palm oil exports was estimated at 240,000 tons.

II. PALM OIL PRODUCTION AND MARKET

(a) Which are the major palm oil producing countries?

Almost half of the world's production of palm oil comes from Malaysia and Indonesia. Nigeria, Zaire and the Ivory Coast together produce about a third of the world's production (Table 2).

(b) Why do Malaysia and Indonesia dominate the supply of palm oil?

Palm oil acreage in these countries expanded mainly in response to a decline in natural rubber prices during the early sixties. Then, in Malaysia and Indonesia, most of the palm oil is produced on estates. Yields on estates generally exceed those of wild groves in many West African countries. The bulk of palm oil comes, therefore, from countries where estates (this includes small holder estates) dominate the production.

(c) What are the long-term market prospects for palm oil?

Supply. The following table shows that soybean oil will continue to dominate the fats and oils market. The continued growth in supply of soybean oil is mainly a result of the demand for soybean meal. (In the crushing process, soybean oil is recovered as a by-product.) Palm oil will increase its share from 6.6 percent in 1975 to 8.7 percent in 1980. Preliminary projections by the Bank's staff put the market share at 10.1 percent in 1985. Most of the palm oil will come from currently existing trees. Continued low prices for palm oil-as projected by the Banks staff-will discourage an expansion of the oil palm acreage.

1 This crop reflects favorable weather conditions which increased average yields by 17 percent. U.S. farmers had expanded their soybean acreage only at 2.4 percent. (Note the importance of weather on soybean output.) The following table shows that most of the other major soybean producing countries recorded also significant increases in soybean production.

WORLD PRODUCTION OF SELECTED OILSEEDS, FATS AND OILS (FAT OR OIL EQUIVALENT), ACTUAL 1960, AVERAGE 1967-69, 1975 PROJECTED 1980 AND 1985

Trade. Although soybean oil is projected to retain its market share of about 30 percent in the world trade of fats and oils, palm oil exports will more than double during the next 10 years (1976-1985). The bulk of palm oil exports flows into developed countries-mainly the EEC-9, the United States and Japan.

Demand. Per capita consumption of fats and oils depends largely on incomes. In many developing countries consumption is less than 5 kilograms. In most developed countries it ranges from 25-30 kilograms. Statistical analysis of the fats and oils consumption pattern shows that demand increases rapidly at low income levels. Thus, considering the population in developing countries, even a small increase in their per capita incomes would create a large potential market for fats and oils. Yet, whether those countries will be able, in the future, to translate this potential demand for fats and oils into an effective demand remains uncertain. Considering that fats and oils consumption in many developed countries will expand only by a small percentage in the future, a large portion of the world's fats and oils supplies will have to be marketed in developing countries. Otherwise, prices for all fats and oils would drop sharply. Considering, in addition, the low production costs of palm oil, such a drop in prices would affect primarily returns to the production of higher-priced oils. The large increase in palm oil supplies during the next five years (1976-1980) will place Malaysia just behind the United States as the world's second major exporter of fats and oils.

WORLD EXPORTS OF SELECTED OILSEEDS, FATS AND OILS (FAT OR OIL EQUIVALENT), ACTUAL 1960, AVERAGE 1967-69, 1975 PROJECTED 1980 AND 1985

Prices. Bank's staff projects a decline in the general price trend (in real terms) for all fats and oils during the first part of the next decade (1975-80). The major assumptions underlying this projection are:

(a) An oversupply of fats and oils caused by: (i) the rapid acreage expansion of oil bearing tree crops in recent years, and (ii) the growing demand for oilseed means.1

(b) A declining market potential for fats and oils in developed countries, where consumption approaches the saturation level. An increase in the demand for fats and oils in these countries is likely to come only from the development of new products or end-uses.

The price trend for fats and oils during the second half of the next decade (1980-85) will depend largely on the capability of developing countries to absorb the projected increase in fats and oils. For this period, the Bank's staff projects a slight rise in the general trend of price for fats and oils. This projection rests on the assumption that producers will reduce plantings in response to declining prices during the first half of the decade, and that developing countries will absorb an increasing share of the total output of fats and oils. (d) In what way does palm oil affect the U.S. soybean producer?

Technically, most fats and oils are interchangeable. However, cost of refining and specific end-use requirements limit the range within which individual fats and oils can be substituted. Technological improvements in the refining of vegetable oils brought palm oil into close competition with soybean oil, rapeseed oil, and lard and other lower-priced fats and oils. (The correlation coefficients computed from prices for major fats and oils shown in Table 3 illustrate this point.) Considering the high degree of interchangeability among commodities in this group, it could be argued that a change in the supply of any individual fat or oil will affect the prices of its competitors. As the supply of an oil increases, its price declines and manufacturers of margerine, shortening, soaps, etc. will substitute the cheaper oil for more expensive ones-within the limits of their product specifications. This is the underlying cause for the recent surge in U.S. palm oil imports.

Imports of palm oil into the U.S. displace other low-priced fats and oils— mainly soybean oil but also imported coconut oil. Since prices for fats and oils in the U.S. market are linked tightly to prices in international markets, palm oil imports have only a minor impact on domestic U.S. prices. This would change, however, as soon as the U.S. imposes a tariff on oil imports. Such a tariff would shelter the U.S. market from fluctuations in international markets.

III. PALM OIL. PRODUCTION AND THE WORLD BANK

The Bank has participated in the financing of plantations of palm oil in Malaysia, Indonesia, Papua and New Guinea, Ivory Coast, Benin (Dahomey), Sierra Leone, Cameroon, Ghana and Nigeria. Palm oil produced in the West African countries is mostly for domestic consumption.

(a) Why does the World Bank finance oil palm projects in developing countries? For many countries in the tropical region, oil palm is the most profitable agricultural crop. In addition, Bank-supported palm oil projects provide the livelihood for a large number of small farmers. The expected economic rate of

1 Most oilseeds contain oil and meal in fixed proportions. The crushing process separates these two products. Because they are joint products, the demand for either product increases simultaneously the supply of the other one.

return on the Bank Group projects has been about 7 to 17 percent in the Western African countries and range from 16 to 20 percent in Malaysia and Indonesia. Bank has also been encouraged to assist palm oil industries because palm are particularly suited as primary crops in smallholder settlement projects. Three projects in different regions of Nigeria, approved in FY 75, are typical of the Bank efforts in this sector. These three projects, for which the Bank loaned a total of $65.5 million, will, at full maturity in 1990, provide 100,000 tons of palm oil for domestic use (Nigeria consumes domestically all its palm oil production) and 22,000 tons of kernels for exports. More than 100,000 people will benefit directly. Another interesting project is the Johore Land Settlement Project in Malaysia, started in FY 74. In this country, development of the vast unused land resources, through settlement schemes, is one of the most effective policy instruments for achieving the goals of continuing growth of the economy, reduction of unemployment and improving income in rural areas. The project consists of clearing 81,000 acres of land and planting about 65,000 acres of palm oil; construction of five palm oil mills; construction of eight villages including settler housing, schools and medical facilities; provision for power and water and settlement of 4,400 miles.

(b) What is the impact of Bank lending for palm oil on the fats and oils market? During the past decade, Bank loans for oil palm projects totalled about US$272 million. The combined output of palm oil from these projects is projected at 430,000 metric tons for 1980 and 610,000 metric tons for 1985. The Bank's staff projects world production of palm oil to increase from 2.7 million metric tons in 1974 to 4.6 million metric tons by 1980 and 5.9 million metric tons by 1985. Thus, the share of palm oil produced by Bank-supported projects in total world production of palm oil would be 9.4 percent in 1980 and 10.1 percent in 1985.

Considering that the share of palm oil in the total production of major fats and oils is projected to increase from 6.6 percent in 1975 to 8.7 percent in 1980 and to 10.1 percent in 1985. the increase in total world suplies of fats and oils that is due to Bank-supported projects would amount to only 0.8 percent of the world total in 1980; in 1985, this increase would amount to slightly more than 1 percent of world total supply of fats and oils.

About 75 percent of the palm oil from Bank-supported projects moves into export markets. The Bank's lending for palm oil has, therefore, a somewhat stronger impact on the international trade of fats and oils. Bank-supported projects would increase total exports of major fats and oils by 1.9 percent in 1980 and 2.4 percent in 1985.

ANNEX 1

TABLE 1.-SOYBEANS: PRICE AND VALUE OF ITS PRODUCTS, 1955-74
[Price and value in U.S. dollars per metric ton]

1 These include soybean oil. sunflower oil, cottonseed oil, groundnut oil, rapeseed oil, olive oil, palm oil, coconut oil, palm kernel oil, butter, tallow and lard.