Why Palm Oil Is So Cheap

When scanning supermarket shelves, have you ever wondered, “Why is palm oil so cheap compared to other oils?”

Palm oil is significantly cheap primarily because of its high yield rate. Palm trees produce 4-10 times more oil per unit of land compared to other oil crops like canola or soybean. Additionally, the labor cost in major palm oil-producing countries is generally low. These factors together make the production cost of palm oil lower, thus lowering its market price.

Let’s delve deeper to better understand the economical aspect of palm oil, and how this intersects with global consumption and production practices.

Unearthing the Origins of Palm Oil

Palm oil, known scientifically as Elaeis guineensis, has a history rich and complex. And it is arguably this history that contributes to its modern-day ubiquity and cheapness.

Originating in West Africa, specifically in areas now known as Angola and Sierra Leone, palm oil has been used as far back as 5,000 years ago. The locals not only used this versatile oil in their diets, but also as a basic substance for medicinal and cosmetic applications. Later, in the 16th Century, Portuguese explorers visiting the region discovered palm oil and began trading it, leading to its spread to other parts of the world.

The industry saw a major expansion during the 19th Century with the advent of the Industrial Revolution. In the 1840s, the United Kingdom identified palm oil as an efficient lubricant for machinery and engines, thereby increasing its demand manifold. This further propelled the creation of commercial palm oil plantations in Africa.

The wide-scale commercial cultivation of the crop, however, didn’t take place until the 20th Century when the British introduced it to the Southeast Asian region, chiefly Malaysia and Indonesia, which, thanks to their warm and humid climate, offered perfect conditions for the growth of oil palm trees.

Today, Indonesia and Malaysia jointly account for over 85% of global palm oil production. As per the World Bank data, in 2019, Indonesia produced approximately 42 million tons and Malaysia about 19 million tons of palm oil.

This mass production scale contributes significantly to the cheapness of palm oil. According to a comparison study between palm oil, soybean oil, and rapeseed oil, the yield per hectare for palm oil is significantly higher. The statistics illustrate that one hectare of oil palm plantation produces about 3.7 tons of oil, whereas the same area for soybean and rapeseed only produces about 0.6 and 0.8 tons respectively.

Hence, the combination of its rich history, the advent of commercial farming, and its large-scale cultivation in suitable climatic conditions of Southeast Asia contribute significantly to the modern-day low cost of palm oil.

Palm Oil Production: A Cost Perspective

One of the main factors contributing to palm oil’s affordability is the low labour costs associated with its production. Palm oil production is a labour-intensive process, heavily reliant on human labour. With much of the palm oil production mainly concentrated in Southeast Asia, particularly in countries like Malaysia and Indonesia, where labour costs are significantly lower compared to other parts of the world, the cost of production is kept relatively low.

Another major factor is the mechanization of the production process. The palm oil industry has embraced technological advancements and mechanization to boost its efficiency and productivity. Harvesting machinery, vehicular transport, and automated processing equipment are primarily used to expedite the production process, thereby lowering the overall cost. Noteworthy of mention is the mechanized process employed in extracting oil from the palm fruit, which has significantly maximized output and efficiency.

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The versatility of palm oil also plays a crucial role in maintaining its low price. It’s a key ingredient in a vast array of products, from food items to cosmetics and biofuels. Some reports suggest that palm oil can be found in nearly half of all packaged products in supermarkets.

Common Uses of Palm Oil
IndustryPalm Oil Use
Food ProductionUsed as a cooking oil and in the production of processed and baked goods
CosmeticsUsed as a moisturizer in products like soap and shampoo
BiofuelUsed for producing biodiesel

Consequently, the high demand coupled with its high yield compared to other oil crops, gives the palm oil industry an upper hand in dictating its market prices. It’s a classic case of supply-demand dynamics where high demand meets an abundant supply, which typically results in affordability.

Spotlight on Sustainability Concerns

The seemingly cheap cost of palm oil hides several unseen impacts, particularly those relating to the environment and human rights. Palm oil production is laden with sustainability concerns that prompt a deeper investigation into the real cost of this edible vegetable oil.

Environmental Impact: A Hidden Cost?

Palm oil is not just economically cheap; it’s also cheap in terms of its production — especially when it comes to the land. However, this discount comes at a hefty cost for the environment.

Deforestation: Green Sacrifice for Economic Gain

Land is cleared to make way for the increasing demand for palm oil plantations. This rampant deforestation is primarily occurring in regions with tropical rainforests with high conservation value.

  • In Indonesia and Malaysia, which together produce about 85% of the world’s palm oil, vast areas of tropical rainforests have been cleared.
  • From 1990 to 2005, approximately 50% of the deforestation in those countries was linked to palm oil production.

Deforestation not only contributes to climate change by releasing large amounts of carbon dioxide but also leads to soil erosion and air pollution caused by the burning of land.

Biodiversity Loss: The Silent Victim

In addition to the destruction of valuable ecosystems, palm oil production dramatically affects biodiversity. Numerous animal and plant species are threatened by the loss of their habitat due to the expansion of palm oil plantations.

In Indonesia alone, species like the Sumatran tiger, orangutan, and Sumatran rhinoceros – all critically endangered – suffer from habitat destruction related to palm oil production.

The Human Rights Dimension

As if the environmental impact wasn’t severe enough, the palm oil industry also has serious repercussions on human rights. Poor working conditions, low wages, unsafe work environments, child labor and land rights violations are some of the critical human rights issues linked to this industry.

Many workers on palm oil plantations, particularly migrant workers, are subject to exploitative labor practices. This often includes long hours, low wages, lack of job security and inadequate safety measures.

Land rights are another significant issue. The expansion of palm oil plantations often involves land grabbing where companies seize indigenous lands without consultation or fair compensation, leading to conflicts and human rights violations.

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In conclusion, while palm oil may be cheap in economic terms, the unseen cost to our environment and human rights paints a different picture. The seemingly bargain price conceals the heavy price paid by our planet and fellow human beings.

Regulations and Their Influence on Palm Oil Prices

Palm oil is a major commodity globally, especially in the food and cosmetics industries. Like all commodities, palm oil prices are influenced by a variety of factors, among the most powerful of which are regulations, trade policies, and tariffs.

Impact of Trade Policies and Tariffs

Trade policies and tariffs play a significant role in the pricing of palm oil. Because palm oil is immensely popular and widely used, countries often negotiate trade deals to import the oil at reduced tariffs. Such policies make palm oil more accessible and affordable to consumers, driving down the price.

For example, the European Union (EU) and Malaysia, one of the largest producers of palm oil worldwide, share a free-trade agreement that allows Malaysia to export palm oil to EU countries at a lower tariff. This type of trade policy impacts the final price of products containing palm oil, making them cheaper compared to other oils like soybean or sunflower.

The Role of Subsidies: Sweetening the Palm Oil Pot

Government subsidies also contribute significantly to the price of palm oil. These subsidies help growers of palm oil to reduce various operational costs, enabling low market prices and high production levels.

By providing subsidies and incentives to palm oil producers and exporters, the government aids in reducing the production cost of palm oil. These measures are often used by countries to promote their national industries, increase their exports, and maintain a stable economy. Lower production costs result in reduced prices of palm oil, thus creating an attractive and competitive commodity on the international market.

In countries like Indonesia and Malaysia, which are among the largest producers of palm oil, subsidies play a crucial role in maintaining competitive prices. For instance, in Indonesia, the government liberally grants agricultural subsidies for various forms of support like fertilizers, seeds, and machinery, which greatly reduces the cost of producing palm oil.

Such supportive trade policies and subsidies are some of the reasons why palm oil is so cheap compared to other edible oils on the market. The affordability and availability of palm oil have thus seen its widespread use in a variety of industries globally.

Unpacking the Influence of Global Demand

The production and consumption of palm oil have significantly increased in recent years due to its versatility. It is used in various daily essentials like cosmetics, processed food, and even biofuel. However, the low price of palm oil is a clear indication that its omnipresence and wide variety of uses have significantly contributed to the excessive production.

Frying, Baking, Soaping: Palm Oil’s Omnipresence

Palm oil is a preferred ingredient in the food industry due to its neutral flavor and high melting point. It is widely used for frying foods and is a fundamental ingredient in baked products. Around 70% of the global palm oil produced is used in the food industry.

Here’s a simple breakdown of common products that use palm oil:

  • Candies and chocolates
  • Margarine and other spreads
  • Ice creams
  • Biscuits and baked goods
  • Fried snacks

In addition to the edible goods, palm oil is a primary ingredient in personal care products and detergents. It provides a creamy texture and foam-building features in products like shampoo, soap, and lotions. The statistics state that around 24% of palm oil is consumed by the cosmetic industry globally.

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Fuel for Thought: Biofuel Needs and Palm Oil

With the growing demand for renewable energy, palm oil has found another avenue of use – biofuels. Biofuels are a form of renewable energy that can act as a substitute for fossil fuels, and palm oil forms a primary input in its preparation. The European Union uses about 45% of its total palm oil import for biofuel production to help meet its renewable energy targets.

This sheer volume of palm oil’s use across various industries contributes to its ever-increasing global demand. The widespread usage also drives the price, keeping it low despite the high demand. Additionally, the palm oil plantation’s economical and less tedious cultivation process compared to other oil crops adds to the affordability of this versatile oil.

However, this affordability and overproduction do come with negative impacts, mainly on the environmental front. The intensive cultivation of palm oil leads to massive deforestation, bringing up serious sustainability concerns.

Challenging the Status Quo: Exploring Alternatives to Palm Oil

The palm oil industry, while rapidly expanding, has faced mounting criticism over the environmental impact caused by the clearance of vast tracts of forestland required for the planting of oil palms. As a result, there’s a global demand for alternatives that can match palm oil’s economic and versatile benefits without imposing such a heavy environmental burden. Naturally, one question arises: Can these alternatives genuinely compete with the cheap giant that is palm oil?

Currently, most of the alternatives aspire to equal palm oil’s profitability, efficiency, and multi-purpose functionality, but few can boast an equal performance. Soybean oil, for instance, requires up to nine times more land to produce the same yield as palm oil, making it a less space-efficient option and thus, less economically feasible. Rapeseed oil, sunflower oil, and coconut oil face similar hurdles. But the windows of innovation are always open, and one promising pathway involves the synthesis of artificial palm oil.

Agriculture Innovation: Is Synthetic Palm Oil the Future?

The invention of synthetic biology has opened numerous possibilities for alternatives to palm oil. Synthetic palm oil, produced through yeast fermentation, is touted as the most sustainable and eco-friendly replacement to natural palm oil. C16 Biosciences and Kiverdi are a few enterprises pioneering this innovation.

Synthetic palm oil boasts of matching not only the functionality but even the cost of palm oil, which according to World Bank, averaged around $600 per metric ton in 2020. Synthetic alternatives promise to maintain a competitive price while drastically reducing environmental impact. If perfected, synthetic palm oil could cause a significant shift in the industry.

However, it’s crucial to note that synthetic palm oil is still in its infant stages. Extensive research and development are needed to make it a widespread and economically viable alternative. While the future of synthetic palm oil seems promising, the path to that future is still fraught with countless challenges and uncertainties.

Meanwhile, the world cannot afford to wait. Other measures like sustainable farming practices, afforestation, and consumer awareness remain crucial for mitigating the environmental damage caused by the palm oil industry.

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