Coconut oil and fad diets

Today I was going to write about coconut oil and the problems fad diets pose for farmers in countries like Vietnam that depend on exporting food products. It was based on this WSJ article (subscription required). The gist is that a few years ago, there were tons of food articles saying that coconut oil would help you lose weight (an example from late 2012 can be found here).

COCONUT OIL PRICES WAY DOWN SOURCE: FOREIGN AGRICULTURAL SERVICE/USDA

But then in July 2018 a Harvard professor called coconut oil “pure poison”. And there have been dozens of articles that talk about the health dangers of eating too much coconut oil (here’s one from the New York Times).

So I thought I would talk about how fad-ish diets can cause farmers to plant more of a certain type of vegetable or other product. If after all that planting is done and the supply is too great or the fad is not longer in fashion, you can see a sharp decline in prices and consumption.

And coconut oil prices are way down (-48% over the past year), bad for a country like Vietnam that produces a lot of coconuts (720m according to a story back in 2011). One province alone (Ben Tre) farms 600m alone, for sales of VND5.4 trillion (USD235m at current exchange rates). To put this in context, total exports of agricultural products were almost USD30bn in 2017, so coconuts are probably a just about 1% of the total. And I don’t really see any data that shows a big increase in production in Vietnam (and the data really isn’t there).

PRODUCTION AND CONSUMPTION HAVE MOVED ONLY SLIGHTLY AROUND THEIR AVERAGE; SOURCE: FOREIGN AGRICULTURAL SERVICE/USDA YEARS END IN SEPTEMBER

If we look at data from the Foreign Agricultural Service of the USDA, world production is just barely above average, and industrial and food consumption of the oil has barely changed over the past 10 years. I would have expected a spike. And during the period where I thought it would be highest (2012-2018), it’s actually fallen.

Now a small disconnect between supply and demand can result in big swings in commodity prices (we see that in crude oil sometimes). Maybe that undersupply and expectations of greater undersupply given the fad diets drove the prices up. An article from August 2017 (here) says there will soon be a massive shortage, presumably in early 2018.

One story that explains the price volatility is this: last year people were expecting much more demand than supply, so prices rose from an average of $1175 per metric ton in 2017 to a high of $1,485 in October 2018. Then actual production starts to come through about 5% up from the year before and the end of year stock actually doubles. Everyone had been expecting a coconut crunch, but what they got was plenty of inventory and moderate demand. Add to that, commodity prices had a horrible 2018, so that might have driven coconut prices even lower. Prices are now the lowest they have been since 2008/9 in the depths of the global financial crisis.

What I take away from all of this is that even when I see a trend so clearly (that fad diets would drive up demand for coconut in the short term but that it would soon die off, like all fad diets), it is very difficult to forecast what that will mean for underlying market prices. Especially when it is something with multiple uses and is globally traded.

The Vietnamese farmers are going to suffer from lower coconut oil prices, but there is a real chance for them to upgrade their production of oil and move up the value chain. That could really help profits at the individual level. Now, of course, it’s hard to come up with capital when your profits have been decimated, but maybe we will see more investment in the sector from companies that benefited from the higher prices, like we did in November 2018 when a local company invested in a new processing plant (read about it here).