By: Suresh Thamotharan -- Senior Analyst, Agro Commodities
01 January, 2017
Increasing focus on regulatory norms such as FDA’s requirement of labeling trans-fat content in nutrition labels,and more recently, the elimination of PHO (Partially Hydrogenated Oils) for manufacturing foods has increased the demand for healthier oils to be used in cooking.
This article focuses on the trend being created by high oleic sunflower oil in the quick service restaurant (QSR) industry and the competitive advantages that QSR industry suppliers are developing for the future.
Increasing global awareness on a healthy diet has shifted the use of high oleic sunflower oil (HOSO) in the QSR industry;in the U.S.andthe EU, palm oil is being replaced by HOSO. This process is being supported by new regulations on package declarations and forbidding trans-fatty acids.
As HOSO is fitting to the healthy food segment, demand is steadily growing and,in turn, forcing producers to keep up with the supply.The expectedgrowth rate of HOSO consumption is above 8percentCAGR until 2023. As Asian countries are also joining the demand trend, new solutions are being implemented to provide intermediate solutions, such as mixing HOSO with other oils for several processes.
However, there is a potential risk of shortage, due to high demand and low acreage of high oleic soybean cultivation, specifically the higher oleic content HOSO variants.
Oleic content of the sunflower can be different;above 75 percent oleic acid in the sunflower seed is accepted as HOSO. However, some buyers may ask for more than 80 percent for their processes, while others accept oleic acid content even if it is above 65 percent. Shortage risk is not associated with countries, even though all importing countries can be affected. It is mostly related to small-and mid-scale buyerswho do not have long-term contracts. Since these typesof buyers need to purchase either on the spot or on short-term contracts, they are most vulnerable to possible shortages. So, a buyer might be required to purchase lower oleic (still high oleic when compared to normal sunflower) content oil in case of any shortage of HOSO.
Demands from major buyers (buyers who require more than 1000 MT/year) are already secured, as contracts are mostly fixed from Sep–Oct 2018, for a 12-month period.
The issue comes from small-scale buyers (local companies which want to introduce new products with HOSO and ho-re-ca channel)as most of the QSRchains, hotels, and fast food restaurants are gravitating toward the trend of switching to HOSO mainly for fried products. New product launches with HOSO are 15 percent above the previous year. A similar growth figure also comes from the ho-re-ca channel. Therefore, suppliers face availability issues for smaller-scale buyers, especiallyfromWesternand Northern Europe.
Major buyers still have secured prices via their long-term contracts from Q4 2018 (around 1020–1030 USD/MT). However, for spot buyers, prices are much higher due to lowered availability in the open market where prices are marked around 1100 USD/MT.
For Q2 2019, the estimated gap between demand (driven by small scale buyers) and supply is approximately 2200 MT. This gap is increasing spot prices and also pushing some local FMCG players to stay with conventional oils, such as sunflower or rapeseed.
In the market, you can see some manufacturers claim their product as HOSO, with Oleic acid content greater than 65 percent with lower prices. This should not be misled, as HOSO should have a minimum of 75 percent of Oleic acid in general. For food processing, higher oleic content gives better results. Therefore, buyers (like PepsiCo–Frito-Lay) ask for HOSO with greater than 80 percent oleic acid, due to its stability in the frying process.
Premium Difference between HOSO and Sunflower Oil
*The above preliminary premiums for HOSO (the preliminary premium is the premium effective if the purchase is made directly from the manufacturers of HOSO)—an additional premium can be applied (by the traders) depending on the demand momentarily (the secondary premium can be an additional 50– 110 USD on top of the primary premium)
HOSO premium (over standard sunflower oil) is based on several factors mainly affecting the supply/demand ratio:
Production of HOSO is very similar to crude sunflower oil. The difference lies in the seeds. The average estimated cost of converting sunflower oil to HOSO is at 200–225 USD/MT.
Conversion from sunflower oil to HOSO requires planning from stage of seeding/cultivation. HOSO production requires high-oleic seeds, which should be planted in the previous season.
So, the conversion cost includes the plantage, harvest, handling, and processing (processing faults can reduce the oleic content). Based on recent conversions from few companies in Europe (Cargill, AAK, Fuji, Euralis, Orkide), the estimated conversion cost is around 200– 225 USD/MT. This cost was much higher before 2017, and most seeds were protected and patented. As patents expire, the availability of seeds increases.
Moreover, higher yield seeds are introduced every season. As the demand for HOSO is constantly increasing, and the supply of high oleic acid sunflower seeds is still less than that of ordinary sunflower seeds, there is a price difference (premium) on HOSO prices over crude sunflower oil prices—approximately 10–18 percent higher on regular sunflower oil prices.
Our expectation is that the conversion cost stabilizes at a rate of 180 USD/MT for 2020 and beyond.
Major buyers have already secured their volume in Sept–Oct 2018; however, increase in demand is witnessed amongst small- and mediumscale buyers who are introducing new products manufactured using HOSO, where new product launches with HOSO are 15 percent above the last year. Buyers who are keen on using HOSO with oleic content above 85 percent are inclined to contract the volume for the following year, or even two years in advance, so that suppliers can also book/contract seed crop accordingly. This advance booking protects the buyer from higher premiums, as the volume/price is fixed on time. Further, manufacturers are moving to be flexible with the oleic acid content of the HOSO.
If the buyer is strictly using HOSO with oleic acid content of above 80 percent, this would limit the supply options. So, they tend to adopt a better option with a range of oleic acid content (i.e. 65 percent, 75 percent and >80 percent). This would also allow the buyer flexibility to switch to lower cost HOSO options during high price/low supply periods. From the buyer’s perspective, critical buyers (companies which require more than 10000MT/year HOSO) tend to have long-term contracts to secure supply. For instance, a buyer, such as Frito-Lay, makes the contract with the supplier (such as Cargill, ADM, etc.) for a fixed volume for following year. (The volume of 2019 purchase is already fixed in 2018, so the supplier accordingly secures the crop of high oleic seeds).
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