Explained: Indonesia’s palm oil crisis, and its implications for India

News: The world’s largest producer and exporter of palm oil, Indonesia, is facing domestic shortages, leading to price controls and export curbs. What explains this situation, and what are the implications for India?

What is the present situation wrt palm oil in Indonesia?

Indonesia has witnessed the domestic prices of branded cooking oil spiral, between March 2021 and March 2022.

On February 1, the Indonesian government imposed a ceiling on retail prices. The price caps, however, led to the product disappearing from supermarket shelves, amid reports of hoarding and consumers standing in long queues for hours.

Besides domestic price controls, the government also made it compulsory for exporters to sell 20% of their planned shipments in the domestic market, at predetermined prices.

What are the possible reasons behind the price rise?

There are two plausible reasons:

1]. Supply disruptions, both man-made and natural, in other cooking oils, especially sunflower and soyabean.

– Russia’s invasion of Ukraine has resulted in port closures and exporters avoiding Black Sea shipping routes. Ukraine and Russia together account for nearly 80% of the global trade in sunflower oil.

– Sanctions against Russia have further curtailed trade in sunflower oil, the world’s third most exported vegetable oil

Soyabean oil, too, is facing supply issues due to dry weather in South America.

Supply tightness in sunflower and soyabean — from war and drought, respectively — has, in turn, transmitted to palm oil.

2]. The second factor is linked to petroleum, more specifically the use of palm oil as a bio-fuel. The Indonesian government has, since 2020, made 30% blending of diesel with palm oil mandatory as part of a plan to slash fossil fuel imports. Palm oil getting increasingly diverted for bio-diesel is leaving less quantity available, both for the domestic cooking oil and export market.

What are the implications for India?

India is the world’s biggest vegetable oils importer. Out of its annual imports of 14-15 mt, the lion’s share is of palm oil (8-9 mt), followed by soyabean (3-3.5 mt) and sunflower (2.5).

Indonesia’s restrictions on exports take into account its domestic demand obligations and its ambitious bio-fuel programme. So in that sense, India must get used to a lower supply from Indonesia.

Source: This post is based on the article “Explained: Indonesia’s palm oil crisis, and its implications for India” published in The Indian Express on 8th Apr 22.