Explained: Indonesia’s palm oil crisis

It is rare for a country that is the largest producer and exporter of a product to experience domestic shortages of the same product – to the point of forcing its government to introduce price controls and restrictions on shipments.

But that is precisely the story of Indonesia vis-à-vis palm oil. The United States Department of Agriculture (USDA) has estimated the archipelago’s palm oil production for 2021-22 (October-September) at 45.5 million tonnes (mt). This represents nearly 60% of total world production and far ahead of the next largest producer: Malaysia (18.7 mt). It is also the world’s leading exporter of this commodity, with 29 mt, followed by Malaysia (16.22 mt).

Yet the country has seen domestic prices for branded cooking oil skyrocket from around IDR 14,000 to IDR 22,000 per liter between March 2021 and March 2022. On February 1, the Indonesian government has imposed a cap on retail prices. These have been set at IDR 14,000 for “premium” packs of 1, 2 or 5 liters and at IDR 13,500 for “simple” containers of less than 1 liter with minimal labeling. Price caps, however, led to the product disappearing from supermarket shelves, amid reports of hoarding and consumers queuing for hours to get a packet or two (IDR 14,000 equals less than 1 $ or 74 rupees).

Besides controlling domestic prices, the government has also made it mandatory for exporters to sell 20% of their planned shipments in the domestic market. These were again at pre-determined prices of IDR 9,300 per kg for crude palm oil (CPO) and IDR 10,300 per kg for RBD (refined, bleached, deodorized) palmolein. The domestic market requirement was further increased to 30% with effect from March 10.

Plausible factors

How to explain this conundrum – consumers unable to access or pay through the nose for a product of which their country is the main producer and exporter?

There are two possible reasons.

The first concerns supply disruptions – both artificial and natural – of other cooking oils, particularly sunflower and soybean.

Ukraine and Russia together account for almost 80% of the global sunflower oil trade, which is quite comparable to Indonesia and Malaysia’s 90% share of palm oil. Russia’s ongoing invasion of Ukraine on February 24 has closed ports and exporters have avoided the Black Sea shipping routes. Sanctions against Russia have further reduced trade in sunflower oil, the third most exported vegetable oil in the world (12.17 tons, according to USDA estimates for 2021-2022) after palm (49, 63 tons) and soybeans (12.39 tons).

Soybean oil is also facing supply issues due to dry weather in South America. The USDA has forecast that Brazil, Argentina and Paraguay’s combined soybean production for 2021-22 will fall 9.4%, resulting in the continent’s lowest crop in six years. Tensions over the supply of sunflower and soybeans, due respectively to war and drought, have in turn been transmitted to palm oil.

The second factor is related to oil, more specifically to the use of palm oil as biofuel. The Indonesian government has since 2020 made it mandatory to blend 30% diesel with palm oil as part of a plan to reduce fossil fuel imports. The country’s domestic palm oil consumption is estimated at 17.1 million tons, of which 7.5 million tons is for biodiesel and the balance of 9.6 million tons for domestic and other use.

“Increasingly diverted palm oil for biodiesel leaves less available, both for domestic cooking oil and the export market,” said BV Mehta, executive director of Solvent Extractors’ Association of India, based in Mumbai. Such diversion became all the more attractive as Brent prices hardened after the war in Ukraine – hitting a closing high of $127.98 a barrel on March 8 and remaining high above $100.

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Impact on India

India is the world’s largest importer of vegetable oils. Of its annual imports of 14 to 15 tonnes, the lion’s share goes to palm oil (8 to 9 tonnes), followed by soya (3 to 3.5 tonnes) and sunflower (2.5). Indonesia was India’s top palm oil supplier, although it was overtaken by Malaysia in 2021-22 (see chart).

On March 16 and 17, the Indonesian government lifted its retail price caps on palm oil as well as the 30% domestic sales requirement imposed on exporters. At the same time, it levied a progressive tax on exports, linked to a reference price for CPO. These rates range from $175 per ton (when the reference export price is $1,000 to $1,050) to $375 (when prices are above $1,500).

Restrictions on exports, even in the form of levies, take into account Indonesia’s higher population (27.5 crores, compared to Malaysia’s 3.25 crores) as well as its ambitious biofuels program (Malaysia n has yet to fully implement even 20% palm oil in diesel). To that extent, the world – and even more so India, the biggest importer – will have to get used to a drop in supplies from Indonesia.

Meanwhile, import prices for edible oils have fallen from their peaks of last month, although they are higher than a year ago. This should bring some relief to both households and industrial consumers (including soap and cosmetic manufacturers) in India.

CPO (cost plus freight, Mumbai) landed prices are currently around $1,750 per tonne, down from $2,000 and $1,175 at the same time last month and a year ago, respectively. The corresponding import prices (current versus a month ago and a year ago) were $1,690 ($1,960 and $1,115) for RBD palmolein and $1,800 ( $1,925 and $1,290) for raw degummed soybean oil.

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