A Demand Model of the Wholesale Vegetable Oils Market in the U.S.A

Abstract

This paper analyzed the quantity-price demand system of vegetable oils market in the United States, focusing on the wholesale market of eight vegetable oils. The global demand for vegetable oils has increased with the overall increase in global food demand. Due to health problems with trans fats (trans fatty acids: TFA) and biofuels issue with crude oil price surge, dramatic changes have been observed in vegetable oils market since the mid 2000’s. We took into account the two major events that might have caused structural changes in the system. We estimated the demand system with eight compensated demand equations, using seemingly unrelated regressions. In this estimation, we specified the first-differenced double-log demand model with homogeneity and symmetry constraints. For each of the vegetable oils, we reported own-price, cross-price, and expenditure elasticities. The results indicate that own-price elasticities are elastic for canola oil and for palm oil contrary to the other six vegetable oils. Palm oil, canola oil and sunflower oil are substitutes for soybean oil. The findings suggest that international prices of palm oil and canola oil affect significantly the U.S. soybean oil demand. Supply policies in export countries and importers’ behavior for palm oil and canola oil have important implications for the U.S. domestic vegetable oils market. The results also reveal that exogenous factors, such as issues of TFA and biofuels, have negatively affected the demand for soybean oil and peanut oil. These same factors, however, have positively affected the demand for palm oil and canola oil since 2004.