Since April 28, 2022, Indonesia has begun a comprehensive ban on palm oil exports, a move that could threaten global food prices and put further pressure on already high cooking oil prices in the country. the world. The ban comes as Indonesia grapples with nationwide cooking oil shortages and high prices, sparking recent protests in the country. Ironically, Indonesia is the world’s largest producer of crude palm oil (CPO).
The Indonesian government has acknowledged that the palm oil export ban will hurt international consumers, but has found it necessary to lower the price of domestic branded cooking oil from Rs 14,000 to Rs 15,000. (0.96 USD to 1.03 USD) per liter to more than 22,000 rupees (1.52 USD) per litre. President Joko Widodo said in his April 27 statement that the ban would be lifted once local demand was met and prices stabilized.
Palm oil is by far the most consumed and traded edible oil in the world. According to the United States Department of Agriculture, 77 million tons of palm oil are expected to be produced this year, with Indonesia accounting for around 60% of the global supply share. Malaysia ranks second with a supply share of 25%.
Grown only in the tropics, the oil palm produces a high quality oil that is used as a common ingredient in cosmetics and household products, such as detergents, margarine, soaps, chocolates, cakes and cleaning products. , and biofuels, among others. .
The Global Cooking Oil Chaos
Global external demand for CPO, in addition to the growing biodiesel (B-30) business in Indonesia in 2020, had already put pressure on CPO prices. In November 2021, global CPO prices reached USD 1,300 per ton; currently the price has been hovering around US$1,600 per tonne.
Additionally, other edible oils have had their production discontinued due to various factors.
Sunflower seed oil
The recent Russian-Ukrainian crisis also contributed to the increase in CPO as shipments from the conflict region fell. The two countries account for 55% of the world’s sunflower oil production.
Between September 2021 and March 2022, sunflower oil prices increased by 73% to $2,844 per metric ton. Europe, India and China are the biggest importers of sunflower oil.
Buyers have turned to palm oil as an alternative to the lost supply of sunflower oil from the Black Sea region.
Global soybean oil prices hit record highs on concerns over Indonesia’s palm oil ban. Argentina, the largest exporter of soybean oil, temporarily halted oil exports in March 2022 to control domestic food inflation. The country eventually imposed an export tax hike to 33% from 31%.
Additionally, dry weather in Argentina and Brazil (another major soybean oil producer) affected production.
Canada, the world’s largest producer of canola oil (a type of rapeseed oil), was hit by a drought in 2021, which reduced oil supplies for 2022.
US-China trade war
The US-China trade war has led China to switch to palm oil as it seeks to reduce its reliance on US soybean oil.
The Evolution of Indonesian Palm Oil Policies
To counter the impact of external pressures, the Indonesian government introduced a Domestic Market Obligation (DMO) scheme in January 2022. Under the DMO, palm oil producers were required to allocate 20% of their planned exports to the internal market. In addition, the government has also attempted to impose a fixed price for domestic sales.
However, the problem became more complicated with the start of the Russian-Ukrainian conflict and cooking oil became scarce. Additionally, raids by police found warehouses stocking cooking oil.
On March 9, 2022, the government decided to increase the DMO allowance to 30%. However, less than two weeks later, the government announced a policy U-turn by removing DMO restrictions and instead increasing its export tax. Under the levy scheme, the maximum tax bill for CPO exports was increased to US$375 per tonne, which, combined with customs duties, increased the overall export tax on oil palm oil at US$675 per ton. At the time, the government said it would use the proceeds to subsidize bulk cooking oil. However, domestic prices continued to climb, but cooking oil was now in abundance in supermarkets and retail outlets.
The government eventually stepped in again and announced a blanket ban. Critics have noted that the huge financial implications of lost tax revenue will be significant. The country exported $28.52 billion in 2021, 44% of which came from refined palm olein.
India, China, Pakistan and Spain are the main destinations for Indonesian palm oil and news of the ban has prompted these countries to look for alternative sources. Malaysia is the world’s second largest producer but struggles to fill the gap due to labor shortages.
India receives 50% of its crude palm oil from Indonesia, or 8 million tonnes per year. With the ban, edible oils, which are already at an all-time high, are expected to increase further. India is already the world’s largest importer of vegetable oils.
Global brands are also expected to be affected by the ban. In 2020, Nestlé purchased around 450,000 tonnes of palm oil and palm kernel oil from Indonesia and Malaysia, while Procter & Gamble used around 650,000 tonnes of palm oil in fiscal year 2020 -2021 for its diverse line of beauty and home products. About 70% of its palm oil comes from Indonesia and Malaysia.
Other global brands heavily dependent on palm oils include L’Oreal, Ferrero, Danone and Unilever, and could see their costs rise as long as the ban continues.
Can Malaysia close the supply gap?
Indonesia’s palm oil ban benefits Malaysia due to higher prices, data from the Malaysian Palm Oil Board shows palm oil exports have increased 48.3% in March compared to February.
However, the country seems unlikely to offset the supply shock as it suffers from a labor shortage. Production growth in Malaysia fell to its lowest level in five years last year as palm oil companies struggled to find enough foreign workers for harvesting jobs, considered dirty and demeaning by locals. About 80 percent of plantation workers in Malaysia are foreigners; the majority come from Indonesia.
As oil palm fruits are harvested once every 10 to 14 days, labor shortage has forced smallholder farmers to harvest the fruits once a month. Many plantations, desperate for workers, tried to attract local workers with higher wages, free housing, and subsidized utilities. However, the attrition rate was high and nearly half of workers hired in 2020 left their jobs.
The government has frozen the hiring of migrant workers for the past two years to stem the spread of COVID-19. Currently, it is accelerating the approval of up to 180,000 foreign workers to ease the labor shortage.
The labor shortage crisis has prompted Malaysian palm oil companies to increase their investment in automation and artificial intelligence throughout the supply chain and reduce their dependence on regard to foreign labor over the next decade.
Reforming the Indonesian palm oil sector
Sudden swings in high domestic prices will continue to plague Indonesia’s palm oil industry unless real reforms are enacted. A major problem is that nearly half of the domestic cooking oil market is controlled by four conglomerates, which also have businesses along the supply chain, from cooking oil refineries to processing plants. . They thus have more leverage to dictate market prices.
Small farms and their cooperatives need to be better integrated into the industry through the development of more small and large scale refineries, especially outside of Java. This can ensure that smallholders have a say in how prices are dictated and are not dominated by larger companies.
In addition, the government must improve its enforcement of the law against oil palm plantations that do not pay their share of taxes or those that operate outside their legally authorized concessions. Up to a fifth of oil palm plantations (3.37 million hectares) in Indonesia operate illegally inside forest areas.
ASEAN Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia and has offices throughout ASEAN, including Singapore, Hanoi, Ho Chi Minh City and Da Nang in Vietnam, Munich and Esen in Germany, Boston and Salt Lake City in the United States, Milan, Conegliano and Udine in Italy, in addition to Jakarta and Batam in Indonesia. We also have partner firms in Malaysia, Bangladesh, the Philippines and Thailand as well as our firms in China and India. Please contact us at [email protected] or visit our website at www.dezshira.com.