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Indonesia’s Palm Oil Export Curbs Will Squeeze Global Supplies

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Palm oil futures hit new contract highs after Indonesia enacted export restrictions. The move threatens to reduce global supplies of the most widely used vegetable oil and adds pressure on competing products, including soybean and sunflower oils, both of which face their own supply risks. 

In a bid to stem rising domestic food prices, Indonesia, the world’s largest producer and exporter of palm oil, announced that local producers must set aside 20% of their planned exports for sale domestically. Producers must also declare their domestic sales plans in order to receive export permits. 

The restrictions are expected to reduce exports from Indonesia, which together with No. 2 producer Malaysia provides nearly 90% of global palm oil supplies. Palm oil  increasingly dominates the global vegetable oil market with a 60% share of trade worldwide. But its geographic concentration in Indonesia and Malaysia places a burden on production, meaning that any supply disruptions can cause price reverberations globally. 

As global vegetable oil supplies tighten, prices have risen substantially for more than a year, hitting profit margins of packaged food manufacturers. Gro’s VegOil Feedstock Price Index, which tracks changes in various oils that packaged food manufacturers often substitute for palm oil, is up 41.8% in January from a year earlier. The index is part of Gro’s newly launched Custom Price Indices application, which enables food manufacturers to create price indices of key ingredients, using customer-selected inputs and weights, and track inflationary pressures.

Additionally, many countries, including the US, plan to ramp up renewable biodiesel production, which promises to substantially add to demand for edible oils, as Gro wrote about here.  

Palm oil increasingly dominates the global vegetable oil market with a 60% share of trade worldwide. But its geographic concentration in Indonesia and Malaysia means that any supply disruptions can cause price reverberations globally.

Production in Malaysia has been weak for six months. Heavy precipitation and flooding, as well as labor shortages, led in December to Malaysia’s biggest month-on-month tumble in production in nearly a year.  

Rising palm oil prices will boost demand for competing products, including soybean oil, sunflower oil, and rapeseed oil, especially among big importers of Indonesian palm oil, including India, China, and Pakistan. 

But other vegetable oils face their own pressures. A second consecutive year of drought in Argentina and southern Brazil, brought on by La Niña, is sharply degrading soybean crop yields and production forecasts in those big producing countries. Gro provides an in-depth look at South America's current season's prospects in our new Strategic Assessment, “2022: The Year South America Drives Global Agricultural Markets,” which is available for download here

Meanwhile, sunflower oil supplies could be at risk from the ongoing military standoff between Ukraine and Russia, the top producers of sunflower seeds and sunflower oil, as Gro wrote about here.  

Indonesia’s new export curbs on palm oil, one of the world’s most widely used commodities, echoes restrictions other countries — including Russia and Argentina — have enacted to maintain domestic supplies as inflation drives up food prices around the globe. But such measures threaten to further tighten global supplies of many commodities and create additional upward pressure for food prices well into 2022. 

-Related Insights:

Gro's 2022 Watchlist: 9 Major Themes for Agriculture in the Year Ahead

Palm Oil Price Surge Drives Global Food Inflation to 10-Year High

India Moves to Tame Domestic Palm Oil Prices With Import Tax Cut

Vegetable Oil Prices Surge on Tight Global Supplies

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