Indonesia drives up prices
Export ban sends shockwaves to palm oil market
By Marina Zapf
04/30/2022, 1:58 p.m
Indonesia’s surprising ban on exports of palm oil is causing turmoil in the vegetable fat markets worldwide – consumers have to brace themselves for rising prices. The ban comes at a time of supply bottlenecks everywhere.
It is the alarm tool of the Food and Agriculture Organization: the FAO price index for cooking oil, which has been rising steadily since spring 2020 and rose again significantly in spring. After production losses due to a lack of workers in the corona pandemic and – due to drought – poor harvests of soybeans in Latin America and rapeseed in Canada, the war in Ukraine is preventing urgently needed quantities of sunflowers from reaching the world market. To make matters worse, Indonesia is now making the situation even worse: with an export ban on palm oil.
The Jakarta government’s decision to impose an indefinite export ban from this week sent shock waves through the already strained vegetable oil market. The government backtracked slightly and is now limiting exports to 40 percent of the usual volume. But the country with 270 million inhabitants is the world market leader. About a third of all vegetable oil exports come from Indonesia. And of all vegetable oils in world trade, about 60 percent is palm and palm kernel oil. The second largest producer, Malaysia, will not be able to compensate for the bottlenecks expected from May.
Commonly used softener
This time, however, price increases will not only affect food security in poor countries, but also leading industrial groups. Whether it’s chocolate, shampoo or cleaning products: palm oil is a popular softener in countless everyday goods. Food groups such as Mondelez, Danone or Nestlé are also major buyers, as are cosmetics manufacturers or producers of cleaning agents such as Unilever and Procter & Gamble.
Energy companies accounted for more than half of the almost 1.4 million tons consumed in Germany in 2020, the rest is distributed among food, animal feed, the chemical and pharmaceutical industries as well as confectionery and detergents, cleaning agents and cosmetics.
Global consumption of palm nut edible oil, like soybean oil, has nearly doubled since the mid-2000s. In South and Southeast Asia – above all in India – palm oil is used for deep-frying and roasting. India gets nearly half of its palm oil imports from Indonesia, Bangladesh and Pakistan, accounting for nearly 80 percent. Nobody can compensate for such a failure, the media quote a Pakistani association representative of the edible oil refineries: “All countries will suffer.”
Empty shelves and long queues
Indonesia’s President Joko Widodo’s drastic reaction conceals an escalation on the domestic market. An export ban was intended to bring under control the extreme price hikes that had sparked protests in the island nation. Widodo was under particular pressure in the world’s largest Muslim country ahead of the Eid-al-Fitr festival, the breaking of the fast. For the first time in two years of the pandemic, you can cook and celebrate extensively at the end of Ramadan.
Widodo announced he would reassess the situation once the domestic market stabilizes and cooking oil becomes available again at affordable prices. However, behind the price increase there were scarce inventories, which also aroused the interest of the cartel watchdogs. Since exports – three quarters of production – are more lucrative for manufacturers, the government tried to improve domestic supplies with quotas. However, the cap on the retail price of cooking oil led to empty shelves and long queues.
Traders held back goods, the media speculated. Because when the ceiling fell, the markets filled up again. However, the price also tripled. Greenpeace Indonesia officials advised the government to “go after the palm oil oligarchs, who often stash away supplies.” In the course of an official investigation, millions of tons were also found in warehouses of the largest domestic conglomerates. Prosecutors in Jakarta have recently started investigating suspicions of a cartel.
Greenpeace calls for deregulation
According to the competent authority, four major groups share almost half of the domestic cooking oil market and are active along the entire supply chain from plantation to mill to refinery. Observers see this market power as the explanation for the government’s failure to assert itself on the price issue.
In the course of its climate policy, however, the latter had itself contributed to a shortage of cooking oil, since – in the competition between tank and plate – it subsidizes the addition of palm oil to biofuel. Non-governmental organizations in the up-and-coming emerging country complain that this is at the expense of the population’s right to food and their supply of sufficient cooking oil. Greenpeace and the opposition are calling for deregulation and fair competition in the palm oil market.
If the world market price for the commodity meanwhile climbs further record highs, the question could also become a topic at the G20 summit in Bali in October, which Indonesia is hosting at the start of its presidency.
This text was first published by Capital.