Price spreads between palm oil and soybean oil are particularly wide on a historical basis, despite a sharp narrowing since the start of the year. But spreads between the two biggest vegetable oils’ prices, which many food companies consider when making buying decisions, could return to still wider levels as 2023 advances.
The relative prices of palm and soybean oils, the two most widely consumed edible oils, are important to food manufacturers because they are often able to use the oils interchangeably as recipe ingredients. The price relationship also is watched by financial firms, which might use the spread as a trading signal.
Currently, the price spread between soybean oil and palm oil is about US$431 per tonne, meaning that a tonne of soybean oil costs $431 more than the same amount of palm oil. While that’s down sharply from more than $700/tonne in late 2022, the current spread is still well above the average for the past two years of US$343/tonne. Historically, soybean oil has typically traded at a premium of $100-$150/tonne to palm oil. (See graph below.)
Driving the price-spread volatility has been the diverging supply/demand picture for the two edible oils. Palm oil prices have slumped in the past year, and they are likely to remain under pressure in the coming months as palm oil production in Indonesia and Malaysia is expected to accelerate in the wake of La Niña’s departure, as Gro wrote about here.
In contrast, soybean oil prices have remained stubbornly high. Supplies are likely to stay under pressure due to severe drought in Argentina, the No. 1 exporter of soybean oil. And soybean oil’s growing use as a feedstock in manufacturing renewable diesel is expected to underpin demand — a trend that has caused soybean oil to increasingly trade roughly in parallel with crude oil prices.
Price spreads also can influence trade flows. China, for example, ramped up palm oil imports in late 2022 at a time when palm oil prices were trading at a deep discount to soybean oil, as shown in this Gro display. While Chinese palm imports so far in 2023 have been muted, the current sharp price spread between the two edible oils — in addition to tight supplies of sunflower and rapeseed oils due to the Russia-Ukraine war — could encourage China to accelerate palm oil imports.
Another possible outcome is that China could step up purchases of soybeans from Brazil to refine into soybean oil inside China, especially with domestic soyoil prices sharply above those of palm, as seen in this Gro display. Brazil, which is headed for a bumper soybean crop, as shown by Gro’s Brazil Soybean Monitor, is the No. 1 exporter of soybeans to China and to the world.