Palm oil: Indonesia export ban could send prices soaring

Hong Kong
CNN Business

This week, a move that could make the global food crisis worse and push up prices of consumer products.

President Joko Widodo said Friday that he would use cooking oil, and the raw materials used to make it, “until further notice,” in a bid to secure local supplies. The ban takes effect on Thursday.

The Southeast Asian country is the world’s largest palm oil producer, and Friday’s announcement sent prices of commodity “berserk,” said James Fry, chairman of consultancy LMC International. Crude palm oil futures in Malaysia, a global benchmark, jumped nearly 7%.

The shock – and prices – subsided a little later this week in Reuters and Bloomberg reported that the government would exempt crude palm oil from restrictions. Indonesia’s agriculture ministry did not respond immediately to a request for comment from CNN Business.

But the restrictions are still expected to include palm olein, a highly processed product which is used for cooking oil and making an estimated 40% to 50% of Indonesian exports, according to analysts. That would fuel inflation, just as global food prices hit all-time highs.

Palm oil is a common ingredient found in many local foods, cosmetics and household items. WWF estimates that it’s used in about 50% of all packaged products in supermarkets.

The commodity is also used for cooking in many countries, including India, the world’s top importer.

Fry said that the price of Many pantry items, such as cooking oil, instant noodles, snacks, baked goods and margarine could Indonesia’s curbs take effect when rise.

Palm oil prices are already under pressure after Russia’s invasion of Ukraine, as markets have scrambled to find alternatives to sunflower oil stuck in Black Sea ports. Ukraine is a major producer of sunflower oil, but that has been “completely messed up by Russia,” Fry said.

“We’ve got the perfect storm,” he added, noting that other factors, such as droughts in South America and Canada, also had limited supply of soybean oil and canola oil, respectively.

Indonesia’s leader, also known as “Jokowi,” said in a statement Friday that the decision to ban exports was made to “ensure the national availability of cooking oil” and help keep it affordable.

According to Antara, Indonesia’s state news agency, global palm oil prices surged, leading the government to roll out cash subsidies.

The country had already taken other steps to protect local supplies. In January, it issued a policy that required exporters of palm oil products to sell 20% of their total exports domestically, according to the US Department of Agriculture (USDA).

The retail price for cooking oil was also “capped” at 14,000 Indonesian rupiah ($ 0.90) per liter, the agency wrote in a February update.

But the problem persisted, leading the government to take the drastic step last week to block exports.

Analysts say that the government wants to make sure there is enough supply of cooking oil ahead the Muslim Festival of Eid, which marks the end of Ramadan and will take place next week. Indonesia is home to the largest Muslim population.

Indonesia is the world’s top producer of palm oil, accounting for 59% of global output last year, according to the USDA.

Malaysia and Thailand follow 25% and 4% of worldwide production, respectively. Colombia, Nigeria and Guatemala are also key producers.

Some analysts say Malaysia could help make up the shortfall, But it’s facing its own supply problems.

Sathia Varqa, co-founder of Palm Oil Analytics, an independent market data publisher, said that Malaysia has suffered from a labor shortage.

JPMorgan wrote in a note on Friday, “Inventories are also historically low”.

Other countries are feeling the pinch.

India, which relies heavily on vegetable oils, Recent shortages of impact have already been made, according to BV Mehta, executive director of the Solvent Extractors’ Association of India.

He told CNN Business that people were turning to other ingredients, such as rapeseed oil and peanut oil, in response to the prices of sunflower and palm oils.

Indian government to increase its own production

“High prices have already been raised for the last two years to raise our own products and productivity, and with Ukraine matter and now… [it] Has a good lesson for us, ”he added.

The Indonesian ban comes at a bad time for global consumers.

The United Nations (FAO) said earlier this month that the world food prices jumped to their highest levels ever. According to its report, “Staple grains and vegetable oils for markets through the Black Sea region spread shocks.”

The most recent FAO Food Price Index – which measures monthly changes in international prices – is a 33.6% higher than in March 2021.

In their report, JPMorgan analysts said that Indonesia’s export ban was “adding fuel to the fire.”

“This is yet another reminder of the vulnerability of present-day agricultural supply chains in an environment that has already historically tightened inventories, combined with the indefinite loss of Ukrainian export volumes and historically high production costs,” she wrote.

In a way, the world has been relying on palm oil from Indonesia to “fill the gap” left by other disruptions – “and Indonesia is blocked by that flow,” Fry said.

– Anna Cooban, Claudia Dominguez, Livvy Doherty, Chris Liakos, Julia Horowitz and Jorge Engels contributed to this report.


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