A price to be paid

29-Jun-2008 - Last updated on 14-Mar-2017 at 18:27 GMT

Increasing demand has brought the cost of oil to record levels. Mary Carmichael reports on a commodity that is liquid gold to manufacturers

The centre of gravity in the economic world is shifting dramatically as the urbanisation of countries such as India and China continues apace and demand for consumer goods and food protein among their huge populations soars.

To compound the problems caused by rising demand for the world's limited resources, there is an escalating demand for biofuels from developed countries. The result is that oil prices around the globe have rocketed, to such an extent that edible oils are now acquiring the 'liquid gold' epithet once reserved for fuel oil.

According to Mintec, which monitors commodity prices, the cost of the three main oils used in food production have more than doubled over the last 18 months.

Sunflower oil has risen from $723/t in January 2007 to a whopping $1,995/t in June 2008. Meanwhile, palm oil and soya bean oil are not far behind, shooting up from $596/t to $1,188/t and $704/t to $1,443/t respectively over the same period.

The fallout from this development is that manufacturers are faced with the increasingly tough challenge of keeping costs down so as not to price themselves out of the market.

A healthy demand

However, as this struggle coincides with guidelines set by the Food Standards Agency (FSA) to reduce the population's intake of saturated fat from 13.3% to below 11% of food energy, and follows a successful drive to remove hydrogenated fats from food production, manufacturers have a lot on their plate.

Many have already made a full-scale switch to healthier or more ethical options. Walkers, for example, has replaced the sunflower oil used in all of its crisps lines with its trademarked sunseed oil, which reduces the amount of saturated fat by up to 70%. And United Biscuits has moved to 100% sunflower oil on McCoy's crisps.

Meanwhile, Sainsbury is now making its Basics Fish Fingers with sustainable palm oil and plans to use sustainable palm oil in all of its own-label products by December 2014.

The trouble is, that acting against this trend for healthier and more ethical and environmentally friendly sourced products, manufacturers are also looking at ways to replace expensive oils in their processes.

Discontinuing products is not on the cards yet, but reformulation is up for consideration as they try to balance the fluctuating prices of different types of oil.

"It's unlikely that any products will be dropped because of rising prices but reformulation is quite possible," says Adam Thomas, senior development manager at oil and fat supplier Aarhuskarlshamn.

"All oils are up at the moment, although some of them are up slightly more than others," he adds. "There are very few oil alternatives and it's a question of balancing out where you can change but it's a difficult one because it depends on the product."

Thomas notes that cost-based reformulation has been going on for ages and people are quite used to chopping and changing between oils. "There is already a lot of reformulation work going on with the reduction of trans-fats but it is still at the early stages," he says.

But Gary Gibbs, head of product development for bakery ingredient supplier British Bakels, believes cost-based switching will have little effect on reducing costs in the medium term because the prices of the different oils will rise according to demand.

"The problem here is that all oils are increasing in price - albeit perhaps at different rates," he says. "If it were possible to replace a costly oil with a cheaper one then many manufacturers would already have made that change for cost-saving reasons over the years.

"Price rises are significant but the prices of different oils are affected by phasing. As people switch, the prices of the cheaper ones rise so the switches are only short term and for the most part it doesn't pay to reformulate. Palm oil is a bit cheaper at the moment, for example, but it will catch up with rapeseed oil if people switch to it."

Widespread impact

The soaring price levels are also affecting the development of less familiar types of oil. Old Fashioned Foods, which supplies rice bran oil, had planned to start pushing the products into food manufacturing this year but Nadia Booth, marketing and technical manager, says plans have had to be shelved.

"We were planning to move into manufacturing but the price of rice bran oil has skyrocketed," she says. "We didn't want to go through all the negotiations with retailers and testing only to be told that the price wasn't competitive, so we are holding off on that for the moment. There doesn't seem to be any light at the end of the tunnel yet, either."

Manufacturers are already well-versed in reformulation. In an effort to reduce saturated fat, many are already using an increased concentration of liquid oil, which disperses better and fractionation, which allows solid oil, such as palm, to be melted and the liquid filtered out. They are also replacing fat in food matrices where there is also water or some kind of moisture with fat replacers such as inulin and oligofructose (both made from chains of glucose and fructose).

But reformulation is only an option with some foods. The composition of chocolate, for example, is governed by European legislation, which doesn't leave a lot of room for movement. Also, aerated products such as puff pastry are also tricky, as solid fat is needed to stabilise the gas bubbles to give it its texture.

Reformulation also depends on what role the oil has in the manufacturing process.

"In many cases specific functionality is required from an oil that makes it impossible or, at least, extremely difficult, to replace with anything else," says fat and oils consultant Geoff Talbot.

Gibbs agrees: "Oil alternatives are only going to be possible in some circumstances," he says. "Oil is there for a reason, not for the sake of it. People are taking fat out anyway on nutritional advice but in pastry and bread for example, it has a key role. Fat is essential for softness and shelf-life. You can reduce it only to a point."

He adds: "It really depends on the application. It is reasonably straightforward for some to switch from one oil to another but there are pitfalls. Rapeseed oil is much more stable than sunflower oil, for example, because it has more mono-unsaturates and it is less likely to polymerise. So if sunflower is being used for lubrication and to keep dough moving, you run a risk. It may work OK for a week but then the machinery will 'gum up' and you'll get carbonisation."

With care, it is possible to switch, says Gibbs. But only on an application by application basis and people need to carry out a proper risk assessment first.

Price rise forecast

In the face of this sort of cost pressure, it is inevitable that most manufacturers are going to have to put up prices. Potato processor McCain has already admitted that it will have to push through double-digit price rises later this year to counter soaring ingredient costs.

McCain's chief executive Nick Vermont is reported as saying that the cost of its sunflower cooking oil had doubled in price between January and March 2008 alone.

As a result, it has been forced to pass on these increases to consumers. While the company could absorb increases of 1-2% through improved efficiencies, said Vermont, these had already been exhausted and to remain in business it had to pass on further cost rises.

No-one in the business believes oil prices will fall in the near future. "Even the most optimistic can only view it as a 'renormalisation' of food prices, which have been artificially low," says Gibbs. And the real pessimists expect further increases. FM

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