Price Volatility in the Edible Oil Market: A Comprehensive Market and Company Analysis

Abstract

In recent years, food prices have shown significant volatility, as evidenced by the fluctuations highlighted by the Food and Agriculture Organization of the United Nations (Chen et al., 2022). The transition from fossil fuels to biofuels has intensified the interconnection between the crude oil and agricultural commodity markets (Ji and Fan, 2012). Recent fluctuations in agricultural commodities and crude oil prices have led to a reevaluation of the interdependencies between energy and agricultural markets, particularly in vulnerable economies that rely on food and oil imports. These trends are influenced by factors such as the energy-intensive nature of agriculture, surges in oil prices, and the involvement of financial investors in commodity markets (Reboredo, 2012; Baffes and Haniotis, 2010). Institutional investors, driven by commodity financialization, integrate commodities into their portfolios, enhance trading fluidity, and promote speculative activities, leading to pronounced price fluctuations (Naeem et al., 2022). The resulting volatility, amplified by events such as the COVID-19 crisis and Ukraine conflict, poses a significant challenge for agricultural commodity manufacturers, particularly for smaller-scale businesses with limited pricing flexibility. These manufacturers often face sluggish pricing dynamics dictated by major retail conglomerates compounded by immutable input costs and minimal room for negotiation due to commodity financialization. These challenges underscore the critical need for a deeper understanding of commodity markets and their inherent risks, which is the focus of the initial chapters of this thesis. Chapter 2 introduces commodities and explains commodity price risks, including holding costs and the convenience yield. Chapter 3 discusses futures and forwards, detailing their specifications and trading mechanisms. These two chapters are based on literature research. Chapter 4 provides a literature review focusing on hedging agricultural commodities, noting the scarcity of evidence on edible oils. Chapter 5 conducts quantitative market and company analyses, particularly examining data from Senna Nahrungsmittel GmbH & Co. KG. The penultimate chapter includes an expert interview with Senna's head of purchasing that addresses transaction costs, pricing parameters, and strategy. Finally, the thesis concludes by summarising its key findings from the literature review, analysis, and interviews, offering practical implications for Senna and suggesting avenues for future research. Among these, this study highlighted significant correlations and trends in the pricing and trading of palm, sunflower, and rapeseed oils, indicating their strong technical substitutability and role in biofuel production. The correlations between energy indices and volatility comparisons provide insights into market dynamics and hedging strategies. Additionally, the analysis of Senna's production and purchasing behaviour underscored the prevalence of short-term orders and minimal price variation across refined oil types. The study suggested that rulebased strategies may not always be advantageous compared to experienced purchasers, particularly in uncertain market conditions, and identified significant differences in markups between crude and refined oils, particularly palm oil.

Date of Award	2024
Original language	English
Supervisor	Stefan Fink (Supervisor)