Indonesia will start restricting exports of palm oil this week, a move that could make the global food crisis worse and push up the prices of hundreds of consumer products.
President Joko Widodo announced Friday that Indonesia would suspend exports of cooking oil, and the raw materials used to make it, “until further notice,” in a bid to secure local supplies. The ban takes effect on Thursday.
The Southeast Asian country is the world’s biggest palm oil producer, and Friday’s announcement sent prices of the commodity “berserk,” said James Fry, chairman of consultancy LMC International. Crude palm oil futures in Malaysia, a global benchmark, jumped nearly 7%.
The shock — and prices — subsided a little this week after Reuters and Bloomberg reported that the government would exempt crude palm oil from the restrictions. Indonesia’s agriculture ministry did not immediately respond to a request from CNN Business for comment.
But the restrictions are still expected to include palm olein, a more processed product which is used for cooking oil and makes up an estimated 40% to 50% of Indonesian exports, according to analysts. That would fuel inflation, just as global food prices hit all-time highs.
Palm oil is a common ingredient found in many of the world’s food, cosmetics and household items. WWF estimates that it’s used in nearly 50% of all packaged products in supermarkets.
What is palm oil?
The commodity is also used for cooking in many countries, including India, the world’s top importer.
Fry said that the price of many pantry items, such as cooking oil, instant noodles, snacks, baked goods and margarine could rise when Indonesia’s curbs take effect.
Palm oil prices were already under pressure after Russia’s invasion of Ukraine, as markets scrambled to find alternatives to shipments of sunflower oil stuck in Black Sea ports. Ukraine is typically a major producer of sunflower oil, but that has been “completely messed up by Russia,” said Fry.
“We’ve got the perfect storm,” he added, noting that other factors, such as droughts in South America and Canada, had also constrained supplies of soybean oil and canola oil, respectively.
Why is Indonesia taking this step?
Indonesia’s leader, also known as “Jokowi,” said in a statement Friday that the decision to ban exports was to “ensure the national availability of cooking oil” and help keep it affordable.
Indonesians have had trouble getting access to the kitchen staple as global palm oil prices surged, leading the government to roll out cash subsidies, according to Antara, Indonesia’s state news agency.
The country had already taken other steps to protect local supplies. In January, it introduced a policy that required exporters of palm oil products to sell 20% of their total exports domestically, according to the US Department of Agriculture (USDA).
The retail price for cooking oil was also later “capped” at 14,000 Indonesian rupiah ($0.90) per liter, the agency wrote in a February update.
But the problem persisted, leading the government to take the drastic step last week to block exports.
Analysts say that authorities want to ensure there is enough supply of cooking oil ahead of the Muslim festival of Eid, which marks the end of Ramadan and will take place next week. Indonesia is home to the world’s largest Muslim population.
Who makes the most?
Indonesia is by far the world’s top producer of palm oil, accounting for 59% of global output last year, according to the USDA.
Malaysia and Thailand follow with 25% and 4% of worldwide production, respectively. Colombia, Nigeria and Guatemala are also key producers.
Some analysts say Malaysia could help make up the shortfall, but it’s facing its own supply problems.
Sathia Varqa, co-founder of Palm Oil Analytics, an independent market data publisher, said that Malaysia had been suffering from a labor shortage since the pandemic.
“Inventories are also historically low” in Malaysia, analysts at JPMorgan wrote in a note Friday.
Other countries are feeling the pinch.
India, which relies heavily on imports of vegetable oils, has already felt the impact of the recent shortages, according to B V Mehta, executive director of the Solvent Extractors’ Association of India.
He told CNN Business that people were turning to other ingredients, such as rapeseed oil and peanut oil, in response to the surge in prices of sunflower and palm oils.
Mehta is lobbying the Indian government to increase its own production of such commodities because of the “crisis” in food security.
“High prices have already taught us in the last two years to raise our own products and productivity, and with the Ukraine matter and now Indonesia … [it] has taught us a good lesson,” he added.
Why is this especially bad now?
The Indonesian ban comes at a bad time for global consumers.
World food prices jumped to their highest levels ever in March, the Food and Agriculture Organization of the United Nations (FAO) said earlier this month. According to its report, “war in the Black Sea region spread shocks through markets for staple grains and vegetable oils.”
The most recent FAO Food Price Index — which measures the monthly change in international prices of a basket of food commodities — was 33.6% higher than in March 2021.
In their report Friday, JPMorgan analysts said that Indonesia’s export ban was “adding fuel to the fire.”
“This is yet another reminder of the vulnerability present across agricultural supply chains in an environment of already historically tight inventories, compounded by the indefinite loss of Ukrainian export volumes and historically high production costs,” they wrote.
In a way, the world had been relying on palm oil from Indonesia “to fill the gap” left by other disruptions — “and Indonesia suddenly blocked that flow,” Fry said.
— Anna Cooban, Claudia Dominguez, Livvy Doherty, Chris Liakos, Julia Horowitz and Jorge Engels contributed to this report.