Growth of Demand and Imports 5. Worldwide, the consumption of fats and oils expanded steadily at an average rate of 3.4 percent per year from 1960 to 1975. 1/ Developed countries account for more than half of world consumption and have been the main export market for fats and oils produced in developing countries. Within the developed countries the most rapid increase in consumption between 1960 and 1975 was recorded in Oceania, Japan and South Africa (7.0 percent per year), followed by Western Europe (3.0 percent) and North America (2.6 percent). Among the developing regions, Latin America recorded the highest rate of growth in consumption (4.3 percent) followed by Africa (3.1 percent) and Asia (2.5 percent). 6. Per capita consumption of fats and oils depends largely on incomes. In several developing countries annual per capita consumption is less than 5 kilograms. In most developed countries it ranges from 25 to 30 kilograms. Statistical analysis of the fats and oils consumption pattern shows that demand increases rapidly with incomes at low income levels. At high income levels roughly those now reached in the United States and some European countries -- the demand responsiveness of fats and oils to increases in income levels off at about 30 kilograms per capita. 7. - Regional consumption patterns of fats and oils generally reflect regional production patterns and natural storage conditions. Economic protection and lower transport costs play an important role in the preference for locally produced fats and oils. In temperate zones, soybeans, cottonseeds and sunflower seeds supply most of the oils needed in the manufacture of margarine, shortening, and other fat products. In tropical and semitropical zones, coconut oil and palm oil dominate vegetable oil consumption. 8. Between 1960 and 1975 more than half of palm oil output has been consumed in producing countries. About 90 percent of palm oil exports go to developed countries. Germany, the Netherlands and the United Kingdom account for almost 60 percent of world palm oil imports (Chart 1). While the shares of the three European countries declined slightly during the past two decades (1955-75), that of the U.S. has tripled over the last ten years. 9. The growing demand for palm oil in the United States largely reflects movements in relative prices. The use of vegetable oils in consumer products has increased at the expense of animal fats, as the latter's relative prices rose, and the price of palm oil declined, relative to those of other vegetable oils. About 85 percent of the palm oil the U.S. uses for edible purposes is 1/ All growth rates in this paper are compound growth rates between the utilized in the manufacture of shortening, 1 and only a small proportion (In the United States, shortening production exceeds In recent years, the trend has been towards increased consumption of shortening at the expense of lard. In addition, shortening made only from vegetable oils has gained at the expense of shortening containing both animal fats and vegetable oils, a shift which is likely to continue, mainly because of the increasing awareness of the health risk associated with consumption of fats and oils containing a high percentage of saturated fatty acids. 10. India, Iraq and, more recently, Pakistan have been the major net importers among developing countries. During the period 1960-64, India's share in total imports of palm oil had grown to 6 percent; however, it dropped to less than 2 percent in the following decade (1967-75) mainly because of import controls imposed by the Indian Government. Iraq's imports continued to increase. Demand Forecasts 11. Projected world demand for fats and oils in 1980 and 1985, shown in Table 1 below, largely reflects conservative projections of real growth in per capita incomes in 145 countries. 2/ 1/ 2/ 3/ ** In 1974 constant U.S. dollars. Sources: FAO (1972-74); IBRD (1976-85). In the U.K. palm oil is used both in margarine and shortening production. 12. In many of the developed countries, at present the main market for exports of palm oil, per capita consumption of fats and oils is gradually approaching a saturation level, and no large increase in overall demand is likely unless new products and end uses are developed. However, since its price is expected to remain lower than those of its main competitors in shortening, and will continue to fall relative to that of soybean oil, in particular, demand for palm oil is likely to benefit from the growth in shortening consumption. 13. As the potential for expanding consumption declines in developed countries, an increasing share of the world production of fats and oils will have to be marketed in developing countries. Demand for vegetable oils in these countries is expected to rise steadily over the next ten years. Particularly marked increases in the demand for palm oil are expected in Nigeria and Indonesia, both exporters at present. 1/ Palm oil has a major advantage over most other fats and oils -- it is comparatively inexpensive 2/- and to some extent it will replace coconut oil both for edible purposes and in the manufacture of soaps. The greatest scope for substituting palm oil for coconut oil in developing countries is in cooking oil. To obtain a product likely to be acceptable to consumers (who traditionally prefer coconut oil for cooking), palm oil has to be fractionated, and the crude liquid fraction (palm olein) has to be refined (de-odorized, de-colorised, and the fatty acids removed) and then either blended with coconut oil or flavored with coconut oil taste. In the refining process many of the nutritional advantages of palm oil, such as its high content of vitamin A, are lost. B. SUPPLY 14. During the remainder of the seventies, world production of fats and oils is projected to grow at about the same rate as during the sixties, and to increase by 18.1 percent over the 5-year period (Table 2). Given the consumption forecasts shown in Table 1, production will exceed consumption by about 1.5 million tons in 1980, and real prices for fats and oils (in 1974 constant dollars) will have to decline below their average level of the sixties (Table 4, Annex I). This decline in real prices is likely to reduce investments in oil bearing tree crops, and thus result in slower expansion of production of fats and oils during the later part of the early eighties. Because consumption of fats and oils is projected to increase considerably faster than their production during this latter period, real prices will rise again. 15. The supply of most fats and oils depends largely on price movements in other markets. Not only are fats and oils extracted from a large number See paragraph 34 below. Food aid from developed countries, such as that from the United States under P.L. 480, could make this price advantage ineffective. Subsidized soybean oil exports severely limit the market potential of palm oil (either domestically produced or imported) in receiving developing countries. of oilbearing materials, but many of them contain other, often more valuable, Table 2: WORLD PRODUCTION OF FATS AND OILS, BY MAJOR GROUPS la Includes soybean oil, sunflower oil, cottonseed oil, groundnut oil, and rapeseed oil. /b Includes olive oil, palm oil, coconut oil and palm kernel oil. Sources: U.S.D.A. (1960-69); IBRD (1975-85). Animal Fats 16. The share of animal fats 2/ in the world fats and oils market will decline from 42 percent in 1960 to 30 percent in 1980, and 29 percent in 1985. Most of this decline will be caused by a sharp drop in lard production. A steady increase in the price ratio between pork and lard has encouraged production of leaner hogs. A similar shift in demand towards leaner beef will slow the growth of tallow production. Nevertheless, tallow will remain a major source of fat; its share in the production of all fats and oils is projected at 10 percent in 1985, about the same as the projected share of palm oil and roughly half the share of soybean oil. The production of butter is projected to increase much more slowly than during the sixties. In most countries butter production has remained almost stagnant, 1/ 2/ It could be argued that continued low prices for fats and oils would |