A double-edged sword for commodities


THE ongoing conflict between Russia and Ukraine has caused commodity prices globally to skyrocket amid fears and knee-jerk reactions over a possible supply-side fallout as both countries are major producers of, among others, sunflower oil, wheat and corn.

According to the US Department of Agriculture, Russia and Ukraine combined account for 78%, 29% and 19% of the estimated 2021/2022 global trade in sunflower oil, wheat and corn respectively.

Hence, when war broke out, it sparked fears of possible shortages of not only global cooking oil but also products related to the industry such as soap, biofuel and other food supplies.

As of March 8, sunflower oil prices were ranging from US$2,900-US$3,000 (RM12,583) per tonne in the European Union. This has resulted in nothing short of a triple whammy for the commodity sector.

The weather condition and Covid-19 related factors had already caused extreme disruptions, and the war hit just as the situation was seen to be on the mend, with global vaccination driving a return to normalcy.

“We were already facing an extreme global production loss during the past two years due to the weather and Covid-19-related factors, and now the Russia-Ukraine war has created yet another sudden disruption in sunflower oil prices,” ISTA Mielke GmbH (Oil World) ED Thomas Mielke said.

He said there is severe tightness and consumers could soon be running out of supplies.

Comparing major vegetable oil prices as of March 4, 2022, Mielke said soybean oil price rose to US$1,773 per tonne year-on-year (YoY) from US$1,147 per tonne, sunflower oil increased to US$2,100 per tonne YoY from US$1,500 per tonne, while palm oil climbed to US$1,760 per tonne YoY from US$1,010 per tonne.

About 86% of the world’s palm oil is currently produced in Indonesia and Malaysia.

In the physical market, Malaysia’s crude palm oil (CPO) price rose to RM8,400 per tonne, while the CPO futures (FCPO) spot-month contract spiked to RM8,757 per tonne.

At the same time, the price of the third-month FCPO contract breached RM7,000 per tonne this year for the first time.

The increase in the FCPO price was also due to Indonesia’s announcement that it would raise its domestic market obligation on palm oil by 10 percentage points to 30%.

Jakarta’s move to restrict exports of palm oil from March 10 onwards is to curb the surge in domestic cooking oil prices.

“Demand for Malaysian palm oil may come down when Indonesia starts exporting in high volumes again. This can happen overnight, just like how the Russia-Ukraine war pushed the crop’s price (higher) recently,” according to LMC International Ltd chairman Dr James Fry.

In the meantime, more than 250,000 Malaysian smallholders could relish the moment before the concern over rising cost and narrow profit margin sets in since fertiliser supplies are also disrupted due to the conflict as both countries are also major fertiliser exporters.

“Russia has bombed a big factory and regional exports are being blocked; therefore, the fertiliser capacity has been destroyed. Russia, Belarus and Ukraine are big fertiliser exporters and this is going to have big consequences in terms of production costs and availability (of fertiliser) for the crops,” Fry told Bernama.

Giving another perspective, the veteran plantation industry analyst opined that a prolonged Moscow-Kyiv conflict could lead to a recession and subsequently reduce the global demand for food.

While the decline in food demand could be transitional and short-term, the same could not be said for fertiliser and petrol prices, he explained.

The saving grace for Malaysia is that the government subsidises the prices of cooking oil and petrol.

For now, Fry said, the CPO price may stay higher a bit longer.

“The crop will be trading between US$1,700 and US$2,100 per tonne until July while in the third quarter (3Q) and 4Q, it will trade between US$1,600 and US$1,800 per tonne,” he forecast.

The price might narrow further if the labour crunch in Malaysia is sorted out, but that is unlikely for now.

Niam Saw Yok, a smallholder who cultivates about 30ha of oil palm, said he is expecting the price of CPO to remain at the current high price and shared Fry’s view on higher fertiliser price.

“The price for 50kg of imported fertiliser is around RM180 now. Before this, it was RM120. But now I have to look for a local brand which costs around RM100-RM120 per 50kg.

“Since I am benefitting from the high crop price, I can still manage the cost by using the local fertiliser brand, which is equally as good as the imported one,” he shared.

Validating another point by Fry, Mydin Holdings Bhd MD Datuk Wira Ameer Ali Mydin said prices of goods are already going up by 15%-20% and it is not just cooking oil.

Nevertheless, he said, the country’s largest halal hypermarket and retail chain has pre-planned its purchase and costing, therefore cushioning the impact.

Currently, the government allocates a subsidy for 720,000 tonnes of cooking oil.

Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said the government will be reviewing the fuel and cooking oil subsidy mechanism, so that it will be more targeted towards aiding and subsidising the vulnerable groups and those who really need help.

He said the current subsidy scheme entails subsidised prices enjoyed by all, regardless of whether they are rich or poor.