As of April 28, 2022, Indonesia has begun a complete ban on palm oil exports, a move that could threaten global food prices and place extra pressure on already steep cooking oil prices worldwide. The ban comes as Indonesia gripes with domestic cooking oil shortages and reins in high prices triggering recent protests in the country. Ironically, Indonesia is the world’s largest producer of crude palm oil (CPO).
The Indonesian government acknowledged that the palm oil export ban will hurt international consumers but deemed it necessary to lower the price of domestic, branded cooking oil, which soared from 14,000 to 15,000 rupiah (US$0.96 to US$1.03) per liter to over 22,000 rupiah (US$1.52) per liter. President Joko Widodo said in his statement on April 27 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 percent of the global supply share. Malaysia ranks second with a 25 percent supply share.
Grown only in the tropics, the oil palm tree produces a high-quality oil that is used as a common ingredient in cosmetic and household items, such as detergents, margarine, soaps, chocolates, cakes, and cleaning products, and biofuels, among others.
The global cooking oil chaos
External global demand for CPO in addition to Indonesia’s growing biodiesel (B-30) activity during 2020 had already put pressure on CPO prices. In November 2021, global CPO prices reached US$1,300 per ton; currently, the price has hovered around US$1,600 per ton.
Further, other edible oils have seen production disrupted due to a variety of factors.
Sunflower seed oil
The recent Russia-Ukraine crisis —also contributed to the increase of CPO as shipments from the conflict region slumped. Both countries account for 55 percent of global sunflower oil output.
Between September 2021 and March 2022, sunflower oil prices have seen a 73 percent increase to $2,844 per metric ton. Europe, India, and China are the largest importers of sunflower oil.
Buyers have turned to palm oil as an alternative for the lost supply of sunflower oil from the Black Sea region.
Global prices of soybean oil have seen record highs on concerns about Indonesia’s palm oil ban. Argentina, the largest exporter of soybean oil, temporarily halted exports of the oil in March 2022 to control domestic food inflation. The country eventually imposed a hike in export tax to 33 percent from 31 percent.
In addition, dry weather in Argentina and Brazil (another major producer of soybean oil) has affected output.
Canada, the largest producer of canola oil (a type of rapeseed oil) in the world was impacted by a drought in 2021, which reduced oil supplies for 2022.
US-China trade war
The US-China trade war led China to switch to palm oil as it looked to reduce its reliance on American soybean oil.
Indonesia’s changing 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 had to allocate 20 percent of their planned exports to the domestic market. In addition, the government also tried to impose a fixed price for domestic sales.
On March 9, 2022, the government decided to increase the DMO allocation to 30 percent. However, less than two weeks later, the government announced a policy U-turn by removing the DMO restrictions and raising its export levy instead. Under the levy scheme, the maximum tax bill for CPO exports was raised to US$375 per ton, which when combined with custom duties, raised the overall palm oil export tax to 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 outlets.
The government eventually intervened again and announced a blanket ban. Critics have noted the huge financial implications of the loss from tax revenues will be large. The country exported US$28.52 billion in 2021, from which 44 percent came from refined palm olein.
India, China, Pakistan, and Spain are the main destinations for Indonesia’s palm oil and news of the ban has sent these countries scrambling for alternative sources. Malaysia is the second-largest producer in the world but is struggling to fill the gap due to labor shortages.
India receives 50 percent of its crude palm oil from Indonesia, amounting to 8 million tons 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 impacted by the ban. In 2020, Nestle bought some 450,000 tons of palm oil and palm kernel oil from Indonesia and Malaysia whereas Procter & Gamble used around 650,000 tons of palm oil during the 2020-2021 fiscal year for its diverse range of beauty and home categories products. Some 70 percent of its palm oil is sourced from Indonesia and Malaysia.
Other global brands that are highly dependent on palm oils include L’Oréal, Ferrero, Danone, and Unilever, and could see their costs rise so long as the ban continues.
Can Malaysia fill the supply gap?
Indonesia’s palm oil ban is advantageous for Malaysia due to higher prices with data from the Malaysian Palm Oil Board showing exports of palm oil increased by 48.3 percent in March compared to February.
However, the country is looking unlikely to make up the supply shock as it suffers from a labor shortage. Output growth in Malaysia slumped to a five-year low last year as palm oil companies struggled to find enough foreign workers for harvesting jobs, which are considered dirty, and demeaning by locals. Some 80 percent of plantation workers in Malaysia are foreigners; the majority are from Indonesia.
With the palm oil fruit being harvested once every 10 to 14 days, the shortage of labor has forced smallholder farmers to harvest the fruit once every 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 froze the hiring of migrant workers over the last two years to stem the spread of COVID-19. Currently, it is in the process of speeding up 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 investments in automation and artificial intelligence along the supply chain and reduce their dependence on foreign labor in the coming decade.
Reforming Indonesia’s palm oil sector
The sudden shifts in high domestic prices will continue to plague Indonesia’s palm oil industry unless real reforms are enacted. A major issue is that nearly half of the domestic market for cooking oil is controlled by four conglomerates, who also have businesses throughout the supply chain from cooking oil refineries to processing mills. They thus have more leverage to dictate market prices.
Smallholder farms and their cooperatives need to be better integrated into the industry through the development of more small and large-scale refineries particularly outside of Java. This can ensure smallholders have an equal say in how prices are dictated and not be dominated by large corporations.
Further, the government needs to improve its implementation of the law against palm oil plantations that fail to pay their share of taxes or those that operate outside of their legally permitted concessions. Up to one-fifth of palm oil plantations (3.37 million hectares) in Indonesia are illegally operating inside forest areas.