Oil shortage takes hold

Russia’s invasion of Ukraine has pushed up sunflower oil prices and created a shortage, prompting importers to turn to alternatives such as palm and soyabean oils. The invasion has also left poorer importing nations vulnerable to higher food and fuel prices Keith Nuthall and Imen Bliwa

The international oilseeds and related vegetable oil markets are facing major disruption through Russia’s invasion of Ukraine, with global vegetable oil prices soaring, according to the UN Food & Agriculture Organization (FAO).

Its Vegetable Oil Price Index averaged 248.6 points in March, up 46.9 points (23.2%) from February, a new record high driven by higher sunflower, palm, soya and rapeseed oil prices. Sunflowerseed oil is a key problem, given Ukraine supplies 47% of sunflower oil exports worldwide, according to UK-based research firm Mintec.

With Russian military forces occupying and disrupting Ukraine agricultural production and supply chains, attacking ports and blockading shipping, Ukraine sunflower oil exports and production have dwindled.

And with international sanctions hitting Russia, its government has imposed an export quota of 1.5M tonnes of sunflower oil from 15 April to 31 August. It is also imposing an export quota of 700,000 tonnes of sunflower meal for the same time period and has banned sunflowerseed exports since 1 April, following a request for this action from the Oils and Fats Union of Russia – which includes the largest sunflower oil producers – to encourage Russian planting in this growing season.

Together, Ukraine and Russia deliver 60% of global sunflower oil production and more than 70% of exports, according to Mintec.

The war and its consequences have therefore inflated sunflower oil prices. The Russian export quota pushed European Union (EU) sunflower oil prices down 6% week-on-week to €1,973/tonne on 7 April, with traders relieved that at least some exports were guaranteed. The 7 April price was 25% under the €2,635/ tonne peak set on 10 March, two weeks after Russia invaded Ukraine.

However, prices still remain high.

“Trade from Ukraine remains halted due to the shutdown of ports and crushing facilities,” noted Mintec.

Russian oil analysts from oilworld.ru note that trade would continue to be impeded by “continued difficulties with foreign exchange transactions against the backdrop of sanctions” and already

high freight costs being augmented by “additional costs for shipowners when entering the Black Sea due to high insurance risks”.

These inflationary pressures have been reflected far from Ukraine and Russia. For instance, the US National Sunflower Association (NSA) valued high oleic sunflower seed prices at crushing plants in North Dakota at between US$38.70–$38.75/hundredweight (cwt) on 21 April, compared with US$33.15–$33.30cwt on 24 February, the day Russian President Vladimir Putin ordered his country’s troops and tanks into Ukraine.

Sunflower oil price inflation and scarcity has disrupted markets, forcing importers and manufacturers to look for alternatives.

“This has led India to pivot to alternative vegetable oils (palm oil and soyabean oil) to secure edible oil supplies ahead of Ramadan (Muslim month of fasting)” – in April for India’s 204M Muslims, for example, said Mintec.

This, noted Caitlin Welsh, director, Global Food Security Programme, on 15 April, pushed up global prices of rapeseed (canola) oil, soyabean oil and palm oil to record highs.

In addition, prices for ammonia, nitrogen, nitrates, phosphates, potash and sulphates (the chemicals used to make fertilisers) have risen by 30% since January, she said.

The US Department of Agriculture (USDA) has predicted that both these trends will encourage oilseed plantings in the USA, with soyabeans being, for instance, less fertiliser-intensive than wheat.

The USDA announced on 31 March that producers surveyed across the USA planned to plant a record high 91M acres (36.8M ha) of soyabeans in 2022, up 4% from 2021, with the largest increases expected in Illinois and Missouri states.

In addition, the USDA’s World Agricultural Supply and Demand Estimates released on 8 April predicted increased 2021/22 US soyabean exports of 2.12bn bushels, “partly offsetting lower exports from Brazil, Ukraine and Russia”.

The department added that a lower Ukraine sunflowerseed crush would cause lower sunflower meal and oil supplies for major markets such as India, China, the EU, and Turkey. This would result in higher palm and rapeseed oil imports for China, higher soyabean oil imports for India, higher soyabean meal imports for Turkey, and higher soyabean imports for the EU.

FEDIOL, the EU vegetable oil and protein meal industry association, said the shortage of Ukrainian commodities on the EU market, especially sunflower oil, had by 24 March triggered market adjustments. “There have been fast reactions of downstream operators who decided to reformulate their product recipes with a view to replace sunflower oil with rapeseed oil where possible,” it said. For frying oils, sunflower oil has already been replaced by palm oil, soyabean oil and rapeseed oil.

Palm oil could indeed be a key beneficiary, predicted Dr Kalyana Sundram a consultant for the Council of Palm Oil Producing Countries (CPOPC). He predicted in a blog that there could be a “return to using palm olein as the frying fat of choice in many snack food manufacturing” companies. He said: “Market forces, particularly in the Asia and Middle East regions are already signalling this makeover.

“For food manufacturers, this would still be an easy switch since there is a large body of readily available data on how best to re-adopt palm olein on its own or in combination with other palm fractions for the fry and snack food industries.”

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The FAO, however, is concerned that less wealthy and smaller markets may struggle to secure supplies of edible oils (along with wheat and fertiliser) “if there is a prolonged disruption in exports of wheat, fertiliser and other items from Ukraine and Russia”. It has warned that because of Russia’s invasion, “the number of undernourished people worldwide could increase by 8M people to 13M in 2022/23, with the most pronounced increases taking place in the Asia-Pacific region, followed by sub-Saharan Africa and the Middle East and North Africa (MENA).”

As a result, the International Food Policy Research Institute (IFPRI) has recommended that countries continue to exempt food and fertiliser from sanctions against Russia, not to impose export bans, prevent hoarding and panic buying, and suspend biofuel mandates “to retain supplies on global markets and quell price spikes”.

Africa is a particularly sensitive zone. Mohamed Sadok Jebnoun, a Tunisian economist, noted: “The Russian-Ukrainian war started while the world was not yet recovered from the economic aftermath of the COVID-19 health crisis. It was expected that the world would be tackling post-COVID-19 recovery. However, this process stopped because of the supply chain crisis and the massive rise in the prices of raw materials” caused by the Russian invasion.

“Ukraine is a major exporter of wheat, cereals, sunflower oils and many other food products to the African continent.”

He said richer MENA countries such as Tunisia might cope while other countries might suffer from harsher effects, such as the Sahel and Sahara Desert countries, adding that key food importers Egypt and Algeria would also suffer.

“The worst scenario is that importing countries will be left with no stock at all for next summer,” said Algerian economist Mourad Kouachi, of the University of Oum El Bouaghi, north-east Algeria. “The worst will come if the conflict continues through the harvest season which will be disrupted in Ukraine. This means famine for many poor countries,” he warned.

Kristalina Georgieva, the Bulgarian managing director of the International Monetary Fund (IMF), confirmed in a meeting with the African finance ministers, central bank governors and United Nations officials on 9 March: “Africa is particularly vulnerable to the impacts of the war in Ukraine through four main channels: higher food and fuel prices, lower revenues from tourism, and potentially more difficulties in accessing international capital markets.”

In Ukraine, the vegetable oil sector and agriculture industry in general have been adapting to the brutal reality of an invasion that the UN said on April 17 had killed 2,072 civilians.

With the spring sowing season beginning, Ukraine oilseed and grain plantings could fall 20%, with yields also decreasing, Ievgen Osypov, chief executive officer of Ukraine oilseed major Kernel Holding SA, said on Bloomberg Television.

The company itself has been publicly appealing for assistance for the Ukraine war effort. In a public statement, it said: “Russia started a full-scale invasion of Ukraine, where key Kernel assets are located, escalating its aggression against Ukraine which commenced in 2014.” Calling on clients and colleagues to boycott Russian media and donate money to Ukraine’s armed forces and charities aiding Ukrainians during the invasion, Kernel called on its business partners to “communicate with your governments, businesses and colleagues to intensify military and other assistance to Ukraine as well as severe sanctions against Russia”.

The Association of Farmers and Private Landowners of Ukraine, issued an emotional statement calling on farmers to continue producing food, despite the war. Its president Victor Goncharenko said: “With the arrival of spring, we must sow the fields as much as possible and plant backyards. There is an urgent need to take care of everyone to provide their families with food.” He said: “The war turned our lives upside down. Many people do not raise their hands to work, it seems that life has stopped. No. It has not stopped, it must continue! We do not fall to our knees, but get up, roll up our sleeves and get to work.”

Commercial farms are still receiving support from the Ukraine government. The Ukrainian State Support Fund (Ukrderzhfond) has announced it will financially support farms, including those undertaking product diversification. It is offering farms loans of up to Ukraine Hryvnia UAH1M (US$34,000) which can be repaid over five years.

FEDIOL has also issued an unusually emotional statement, alongside COCERAL, the European association of trade in cereals, oilseeds, pulses, olive oil, oils and fats, animal feed and agrosupply, and FEFAC, the European Compound Feed Manufacturers’ Federation.

They said they “share their deep sorrow with the Ukrainian people, as the humanitarian tragedy is unfolding in the country and the Russian Federation continues its unprovoked invasion of a sovereign state.”

Oilseed and vegetable oil companies are working to protect the security and well-being of Ukrainian employees and will honour contracts, said the three associations, “conscious that the importance of Ukraine’s supply of agricultural raw materials and ingredients to the EU is such that our inability to import from that country will create severe shortages, both for the feed and food industries.” ● Keith Nuthall and Imen Bliwa write for International News Service Ltd, UK