Indonesia’s decision to suspend palm oil exports amid domestic shortages has pushed vegetable oil prices to new highs, further tightening a market already strained by the war in Ukraine and global warming.
Prices for palm, soybeans, European canola and even its Canadian GMO counterpart, canola oil, have hit all-time highs following Indonesia’s announcement on Wednesday.
“We’ve already had problems with soybeans in South America, with canola in Canada,” said Philippe Chalmin, an economics professor at the University of Paris-Dauphine in France, noting that both crops have been badly affected by prolonged droughts.
Then came the devastation for “sunflowers in Ukraine” due to Russia’s destructive invasion, he added.
Palm oil is the world’s most consumed vegetable oil, and according to James Fry, chairman of consultancy LMC, Indonesia accounts for 35 percent of global exports.
According to the authorities, the Indonesian export ban is intended to lower prices in the country and limit bottlenecks.
But Chalmin said the move “comes at the worst possible time”. “The price increase is already going back to last year and is exacerbated by the Ukraine conflict,” he explained.
Rich Nelson of agricultural research and trading firm Allendale said: “The industry thinks it’s going to be maybe a month, maybe two.” But meanwhile, prices are shooting up in an “already accelerating” market, he said.
Unlike other oilseeds, palm fruit doesn’t keep once it’s picked and needs to be processed immediately, Fry said.
Indonesia’s oil palm storage system, which already had significant reserves, is now under further stress, Fry said.
vicious circle
Although the price of vegetable oil, along with many other agricultural commodities, has been rising for months, demand has not yet slowed down.
“It’s difficult to ration demand for higher-priced food,” said Arlan Suderman, chief commodities economist at StoneX Financial.
Palm oil, used heavily in processed foods like instant noodles and baked goods, is also found in other consumer products like personal care products and cosmetics.
“It will eventually trickle down,” said Paul Desert-Cazenave of consulting firm Grainbow, “but it’s too early to measure price increases for consumers.”
In the short term, the only oilseed that could provide some relief to the vegetable oil market is the soybean.
The United States and Brazil, the world’s two largest soybean exporters, still have available inventory, although more shipments from the countries would have little impact on cooking oil prices.
The United States Department of Agriculture (USDA) announced last month that it expects soybean acreage to increase by more than 4 percent year-on-year, while corn would shrink by a comparable amount.
The world’s largest canola seed exporter, Canada, said on Tuesday it expects a 7% drop in the acreage used for the GMO canola seed used in canola oil.
Analysts and economists say they see the need for public policy on the food crisis as vegetable oils are used extensively in biofuels in addition to food.
Because of the current crisis, “we’re going to see more pressure on countries to reduce their biodiesel and renewable diesel blending requirements,” Suderman said.
“It’s going to take time,” he warned, “but that’s ultimately where you’re going to get your greatest demand destruction.”
Europe passed a directive in 2018 that excludes palm oil from 2030 renewable energy targets. Some countries in the bloc, including France, have already phased out the use of palm oil.
Despite the current turmoil, Indonesia and Malaysia, the world’s second largest exporter, have maintained their respective programs to blend palm oil into their biofuels.
To make matters worse, many of the big palm oil importers, mainly Egypt, Bangladesh and Pakistan, have significantly devalued their currencies in recent months, said Michael Zuzolo, president of Global Commodity Analytics and Consulting.
Meanwhile, some major oilseed exporters such as the United States and Brazil have experienced the opposite, with the dollar hitting multi-year highs.
“This is kind of a worst-case scenario that’s starting to unfold,” Zuzolo said.
Putting importers in a “negative feedback loop where they will have increasing difficulty keeping enough stock is the potential tragedy we are entering.”