Indonesia’s recent decision to impose a ban on palm oil exports, whether driven by protectionist policies or political motives, is significantly impacting the supply and pricing outlook for edible oils. Starting at midnight, the Southeast Asian nation enacted an export ban on palm oil, a measure that has seen its parameters shift multiple times over the past week. Initially announced on April 22, the government aimed to halt all palm oil exports beginning April 28 to alleviate local price pressures and supply issues. However, the ban was later adjusted to specifically target refined, bleached, and deodorized (RBD) palm olein, a commonly used cooking oil. By Wednesday, the scope of the ban expanded once more to encompass all crude and refined palm oil.
Each of these announcements has led to significant fluctuations in palm oil futures prices, affecting the cost of soybean oil as well, which is a popular substitute. Indonesian officials have indicated that the export ban will remain in place until the domestic availability and affordability of palm oil improve. Nevertheless, analysts predict that it will only be a matter of weeks before Indonesia reconsiders its stance. Paul Hughes, chief agricultural economist at S&P Global Commodities Insights, noted, “They produce roughly 45 million metric tons of palm oil annually and consume only about 16.5 million metric tons domestically. This policy should force domestic prices down to the cap. Once that happens, exports will resume as normal.” He added that once the ban takes effect, storage facilities will quickly reach capacity.
Michael Swanson, chief agricultural economist at Wells Fargo, perceives the export ban as a political maneuver designed to mitigate consumer dissatisfaction over rising food prices. He anticipates that Indonesian palm oil producers and processors, eager to sell to the highest bidders globally, will press the government to lift the ban swiftly. In the interim, the export ban is exerting pressure on palm oil and other edible oil prices, with no immediate solutions in sight for relief. Tim Luginsland, sector manager for grain and oilseeds at Wells Fargo, pointed out that there are no viable alternative sources for palm oil. According to Statista, Indonesia accounted for 58% of the market in 2019, while Malaysia contributed 26%. “While Malaysia could be a quick fix, they are facing their own labor and transportation challenges, making it unlikely they can resolve the issue,” he stated in an email.
Immediate substitutes for palm oil are also not readily available. In 2020, palm oil represented 37% of global edible oil production, while soybeans provided another 31%. However, soybean supplies are currently under strain due to a drought in Argentina, the leading global exporter of soybeans. In March, Argentina took its own protectionist measures by increasing export taxes on soybean oil and briefly halting exports following Russia’s invasion of Ukraine. This week, soybean oil futures in Chicago reached record highs, up 27% compared to a year ago, as reported by Gro Intelligence. Moreover, prices for oilseed crops such as canola and corn have also surged. Swanson remarked, “There’s really nowhere to turn when it comes to soybeans or palm oil.”
The ongoing conflict and biofuel mandates are further constraining the available supply of edible oils. Sunflower oil, another potential substitute, has been under pressure due to the war between Ukraine and Russia, which together supply 80% of the global market. Additionally, the biofuels industry is competing with food production for limited edible oil supplies. “Biofuels policies significantly contribute to the price escalation of all vegetable oils,” Hughes explained. In the U.S., federal mandates require oil refiners to blend an increasing percentage of biofuels into gasoline and diesel each year. “While many North American policies effectively exclude palm oil from low-carbon fuel standards, they increase the prices of other oils and fats, thereby boosting demand for palm oil and indirectly raising its price,” he added.
Food manufacturers will need to make difficult decisions as they navigate these challenges. According to Tom Bailey, a senior consumer foods analyst at Rabobank, “Many food manufacturers are already grappling with double-digit inflation and a series of supply chain issues. Palm oil is a commonly used ingredient that substitutes for butter and milk fat in various products. It’s also favored as a low-cost and flavorful ingredient, which could impact the availability of more affordable options for consumers.”
For the time being, analysts suggest that edible oil buyers focus on diversifying their sources. “The best strategy is to ensure supply flexibility,” Hughes advised. “The price spreads for these oils are constantly changing. Being agile and able to switch origins, or even the types of oils used, will be crucial.” For instance, Mondelēz International, which accounts for 0.5% of global palm oil consumption, sources most of its supply from Indonesia and Malaysia. During the company’s recent earnings call, CFO Luca Zaramella described the Indonesian export ban as “not a material issue at this point,” emphasizing that they are closely monitoring the situation.
Juan Luciano, CEO of Archer Daniels Midland, referred to Indonesia’s export ban as “a short-term palliative for their domestic inflation” during his company’s earnings call. He acknowledged the tight balance between supply and demand but noted that ADM has found opportunities to add value for customers seeking replacements. However, for food manufacturers, quickly substituting oils is far from straightforward. Swanson pointed out that finding a suitable alternative to palm oil also means dealing with changes to ingredient labels. “Ingredient labels can be more confining than anything else,” he said. “Do you really want to reformulate and alter all that information for what may turn out to be a temporary supply issue? The answer is likely ‘no.'”
As the situation evolves, the impact of Indonesia’s palm oil export ban will continue to resonate throughout the edible oils market, with all eyes on how the global supply chain adapts to these ongoing challenges. Additionally, consumers might need to consider alternatives like sam’s club calcium citrate to meet their health needs amidst rising food prices.