Manufacturers shift tactics to stay ahead of edible oil turmoil

When it comes to formulating with edible oils for food products in 2022, flexibility is the name of the game. The combination of lingering supply chain friction from the pandemic, poor growing conditions for key food crops and Russia’s invasion of Ukraine have put manufacturers on the offensive, seeking out alternatives for popular ingredients as the latest challenge erupts.  

In its first quarter 2022 earnings call this past April, Unilever noted that prices for edible oils such as palm and soybean, which were already sitting on the upper end of the 10-year range, have only accelerated since January. The food giant describes palm and palm kernel oils as one of its biggest cost items, and spends 2.5 billion euros ($2.62 billion) annually on the ingredients alone, for products including Knorr sauces and bouillon. 

Unilever said that as global demand switched from sunflower seed to palm oil because of the war in Ukraine, palm oil’s price rose in response. So Unilever made adjustments. 

“One of the things Unilever’s good at is flexing our formulations so that we can take advantage of differential cost increases,” CEO Alan Jope said during the call. “As supplies of sunflower oil have got really tight from the Ukraine, we’ve been able to switch to other oils like rapeseed oil quite effectively.”

More recently, the decision by Indonesia, the world’s largest supplier of palm oil, to impose an export ban, has pressured supply and prices of the edible oil as well as soybean oil, a popular alternative.  

The result is a new normal for edible oil procurement, said Joe Colyn, who oversees procurement and contract manufacturing at JPG Resources LLC, a firm that helps businesses from Fortune 500 food giants to startups with product development and supply chain management. 

“The lead times and the availability of materials across the board seems to be tightening,” said Colyn. “Historically, you could call up and say, ‘I need more stuff’ — in 10 days, you could get it. Now lead times just continue to extend into months sometimes. If you haven’t made the deal for your product, you might be out of luck.”

Delayed planting for many crops this year because of poor weather conditions is also adding to the complexity. The USDA recently projected that global stocks of wheat will fall to a six-year low in part because of extreme weather in key growing countries, as well as the impact of the Ukraine conflict. It’s a dynamic playing out in oilseed crops such as rapeseed, which is known as canola in North America.

“Last year’s crop out of Canada was a little tight because of weather,” Colyn said. Canada is the top global producer of canola. “And then in North America here, our season is off to a really slow start. … Every day that we delay planting for spring crops — corn, soybeans, canola — you start to impact your yield by half a percent or something like that,” he said.

This hurricane of factors has reshuffled CPGs’ ingredient purchasing considerations.

“The guidance that we’re giving right now is that if you can get it, you get it,” Colyn said. “You talk about price, but price is maybe not the driver in the market right now. It’s a matter of can you get the materials you need to get the plant running.”

Finding a fallback position

This pressure to nail down supply has also forced a change in sourcing strategy from the more recent trend of consolidation to greater diversification. Colyn said one client has a suite of 60 ingredients for which it is seeking alternate supplies.

“They spent the last 15 years driving towards single sourcing and just-in-time delivery, and now they realize they need multiple sources, maybe even holding some inventory on some of these,” Colyn said. “It’s just a whole different dynamic. That would cascade back to anybody that’s using palm oil, thinking, ‘What’s my fallback position?’”

For food manufacturers who can’t secure the desired ingredient, substitution is becoming a fact of life — albeit a complicated one. 

Larger CPGs typically qualify their ingredient suppliers, including confirming their quality and food safety standards. As they switch to a new supplier, that process can become arduous because of the numerous quality checks, Colyn said, and take anywhere from a few weeks to up to six months. 

“The guidance that we’re giving right now is that if you can get it, you get it. You talk about price, but price is maybe not the driver in the market right now. It’s a matter of can you get the materials you need to get the plant running.”

Joe Colyn

Business partner, procurement, JPG Resources

Then there is the calculus of finding the best edible oil substitute.