NWO.ai signals for Palm Oil are exploding: Where is the opportunity?

There's an abundance of shortages everywhere you look. In the grocery store, mall, online, your local bodega, and every week, a new product or commodity is joining the list.

This week? Palm Oil. Unfortunately, Palm Oil is in just about everything. According to the WWF, palm oil is in nearly 50% of packaged products in supermarkets, everything from bread, sauces, chocolates, and chips, to deodorant, shampoo, toothpaste, and cosmetics. Additionally, palm oil is a critical ingredient in biodiesel fuels.

Why is Palm Oil so popular?

Palm oil is a versatile oil with many different properties and functions (and it's relatively cheap). For example, palm oil is semi-solid at room temperature, so it's great for spreads (e.g., butter, lipstick), it's resistant to oxidation, so it extends the shelf-life of food products, it has a high smoke point, so it's great for frying foods, and its phytochemical make-up makes it ideal for biofuels.

Why is there a Palm Oil Shortage?

Like most shortages we are seeing, it's a combination of factors. The simple answer is that the war in Ukraine has driven up the price of sunflower seed and safflower oil (Ukraine accounted for 30% of the global supply) which indirectly led to an increase in demand and price for Palm Oil. The ultimate price catalyst, though, is the Indonesian government.

The Indonesian government announced a ban on all palm oil exports beginning yesterday, April 28th. Indonesia produces nearly 60% of the global supply of palm oil, and prices were already at all-time highs. The ban comes after increased public pressure and protests against the soaring food prices and energy costs on the island-chain nation. Palm oil is the most commonly used cooking oil and is a key ingredient in biodiesel fuels used in the country.  The export ban is intended to drive down the domestic price.

President Joko Widodo said in a statement this week that "[he] will monitor and evaluate the implementation of this policy, so availability of cooking oil in the domestic market becomes abundant with affordable prices."

With soaring inflation, it's difficult to know what exactly the threshold will be to reverse the ban. However, reactions are mixed from domestic producers, but Indonesia's Oil Palm Farmers Union supports the measure and its goals. As long as labor unions and domestic farmers favor the export ban, we can anticipate that the government will keep the policy to quell domestic discontent in the short term.

What sectors will be impacted?

Most of them, probably. But let's zero in on a few: Energy, Consumer Goods, and Food and Beverage.

I. Biofuel Prices  

Biofuels are a fuel produced from plant products, including palm, soy, corn, coconut, and rapeseed oil. Biofuels account for 30% of the fuels used in US transportation and a significant portion of the biofuels produced are supplied to Asian markets, including Indonesia, India, China, Malaysia, and Pakistan. As a result, we can expect to see increases in biofuel costs. The MLX Biofuels Index ($FUE) price strongly correlates with the impact score signal for "Palm Oil Price," and the signal is leading the price. There may be a near-term opportunity in biofuel companies and ETFs such as $FUE.

II. Consumer Product Companies  

Palm oil is a key ingredient in cosmetics, shampoo, detergent, soap, face wash, and other everyday consumer products. Some of the top CPG buyers of palm oil by volume include Unilever ($UL), The Estée Lauder Company ($EL), Colgate-Palmolive ($CL), and L'Oréal S.A. ($LRLCY). We can expect to see these companies offload the increased costs to manufacture their products to the consumer. Although, they'll still be a hit to their bottom line (and ultimately, stock price). I would expect cosmetic companies such as Estée Lauder and L'Oréal to see a bigger hit as consumers drop spending on discretionary items during a period of already high inflation.

III. Food and Beverage Companies

Similarly, as in the consumer products space, food and beverage companies make up a large share of palm oil buyers. The top buyers include; PepsiCo ($PEP), Yum! Brands ($YUM) and Mondelez International ($MDLZ). As with the cosmetic companies, I anticipate these companies will take a hit as consumers cut spending on "non-essential" foods like sodas, chips, cookies, crackers, and candies.

Despite CPG generally performing well during times of market downturn, given the supply shortages and inflationary pressures, consumer companies that focus on discretionary products will take the biggest hit this summer.

Alternatives to Palm Oil

Companies and biofuel producers will look at countries with less political uncertainty to procure seed oils in the long term to securitize their supply chains from risk. I anticipate that American Canola and Sunflower Oil producers will benefit from the palm oil shortage. The companies best positioned to ramp up seed production include Bunge Ltd ($BG), Archer-Daniels-Midland Co ($ADM), and Corteva Inc. ($CTVA). Over the past six months, their stock prices have been up 26.11%, 44%, and 34%, respectively. These companies correlated over 98% to the signal for Palm Oil Price and their prices have lagged the impact score by 14-days.

Additionally, the move away from Palm Oil may be a net positive for the environment. Palm oil farming is incredibly unsustainable and results in large swaths of deforestation and high carbon emissions. Even before the war in Ukraine and supply chain shortages, we have seen companies look for "sustainable" palm oils or palm oil alternatives.

So the export ban proposed by the Indonesian government may accelerate companies moving away from Palm Oil entirely. If that happens, the Indonesian government will realize the mistake they made and that the global market they stopped selling to will become a lot smaller when they reopen exports.

Summary: Stocks to Watch during the Palm Oil Shortage

Bullish: $FUE, $BG, $ADM, $CTVA

Bearish: $UL, $EL, $CL, $LRLCY, $PEP, $YUM, $NDLZ

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Disclosure: NWO.ai does not have a position in any equities, commodities, or cryptocurrencies mentioned. Nothing contained in this website should be construed as financial advice.