Palm Oil Crisis and its Implications for India – Explained, pointwise

Introduction

Indonesia, the world’s biggest producer, exporter, and consumer of palm oil, will ban all exports of the commodity and its raw materials from April 28. The objective behind this decision is to reduce domestic shortages of cooking oil and bring down its skyrocketing prices. India is already grappling with record-high wholesale inflation. The export controls exercised by Indonesia in late January has led to a 38% rise in the landed cost of CPO (Crude Palm Oil) in India. The current palm oil crisis is going to make the situation worse for India which is the biggest importer of palm oil in the world.

What is Palm Oil?

Oil palm is a low maintenance, high yield, perennial plantation crop. It is one of the essential food items and widely used by a majority of Indians. Palm oil is widely used for blending refined oils. It is used as a cooking oil and is omnipresent in packaged and processed foods. It has widespread usage, in everything from cosmetics to processed food to cleaning products. 

Palm oil accounts for over a third of India’s edible oil consumption. Overall, India imports 60% of its requirements.

What is Palm Oil’s status in the Global Supply Chain?

Palm oil is the world’s most widely used vegetable oil with its global production in 2020 exceeding 73 million tonnes (MT), as per the United States Department of Agriculture (USDA). Output is estimated to be 77 MT for the current year. Palm oil is preferred by many people across the globe as it is inexpensive in comparison to other edible oils.

Indonesia and Malaysia together account for almost 90% of the global palm oil production, with Indonesia producing the largest quantity at over 43 MT in the 2021 crop year.

Palm oil makes up 40% of the global supply of the four most widely used edible oils: palm, soybean, rapeseed (canola), and sunflower oil. Indonesia is responsible for 60% of the global supply of palm oil.

What factors forced Indonesia to ban exports leading to the palm oil crisis?

Rise in Price of Palm Oil: The price of CPO (Crude Palm Oil) rose from an already high rate of $1,131 per metric tonne in 2021 to its highest ever price of $1,552 in February this year. The prices of palm oil rose this year due to: (a) Short supply of alternative vegetable oils: The production of soybean oil, the second most-produced oil, is expected to take a hit this year due to a poor end soybean season in major producer Argentina. The production of canola oil was hit in Canada last year due to drought; and supplies of sunflower oil, 80-90% of which is produced by Russia and Ukraine, has been badly hit due to the ongoing conflict; (b) Impact of Pandemic: The pandemic brought a series of lockdowns and reduced mobility of labor that impacted production of palm oil and increased global edible oil prices to record highs; (c) Global Food inflation: Food prices rose by almost 13% globally in March according to the United Nations. The rise in global prices pushed the price of palm oil as well.

Ineffectiveness of Price Capping and Export Quotas: Price Capping was 14,000 Indonesian Rupiah (IDR) for branded oil and 11500 IDR for local products. Further,  the government introduced a two-litre-per-person rule for buying cooking oil. Later on, export limits were also imposed. However, hoarding by consumers and sellers was witnessed. Further, rising global prices and low domestic prices of palm oil induced exporters to obtain illicit export permits amid the export restrictions. All this created an acute shortage of cooking oil in Indonesia.

Growing Demand of Palm Oil in other Sectors: The cooking oil shortage could in part also be attributed to Indonesia using large quantities of CPO to make biodiesel. In late 2019, the country increased the palm oil content to be used in biodiesel to 30%. Reuters reported that it used over 7 MT of palm oil out of its total national output of 41.4 MT in 2020, on biodiesel. The diversion has exacerbated the palm oil crisis.

What are the possible implications of the palm oil crisis?

Increase in Price of other edible oils:  After the ban, the global prices of other vegetable oils saw spikes. The price of soybean oil jumped 4.5%, taking it to a record high of 83.21 cents per pound on the Chicago Board of Trade. Soy oil prices have already seen a 50% rise so far this year.

Impact on India: India is the biggest importer of palm oil which makes up 40% of its vegetable oil consumption, as per the USDA. India meets half of its annual need for 8.3 MT of palm oil from Indonesia. Despite the rising prices of the commodity, India’s palm oil imports jumped 21% in March from the previous month as traders moved to secure alternatives to sunflower oil that could no longer be bought from Ukraine. 

Source: Indian Express

The export ban is expected to push the prices even further. It will also create additional forex burden and enhance the already high Fiscal Deficit of the country. 

Further the inflation level in the country will also increase, creating trouble for the Monetary Policy Committee to keep CPI in the range of 2-6%. Inflation will occur as palm oil is used in a variety of products which are directly consumed by the masses including packaged foods, cosmetics etc.

The inaccessibility of affordable cooking oil may enhance the level of hunger and malnutrition in the country. India has already slipped to 101st position in the Global Hunger Index (GHI) 2021 of 116 countries, from its 2020 position of 94.

What steps have been taken by the Government to enhance oil palm production?

Since 1990s, the Government has taken several steps for palm oil production.

A comprehensive Centrally Sponsored Scheme named Oil Palm Development Programme (OPDP) was taken up during the Eighth & Ninth Plan (1992-2002).

During the Tenth and Eleventh Plan (2002-2012), the Government of India had provided support for oil palm cultivation under the Centrally Sponsored Integrated Scheme of Oilseeds, Pulses, Oil Palm and Maize (ISOPOM).

To boost oil palm cultivation, the Government of India had implemented a Special Programme on Oil Palm Area Expansion (OPAE) under RKVY from the year 2011-12 to 2014-15.

During the 12th Five Year Plan, a new National Mission on Oilseeds and Oil Palm (NMOOP) was launched under which Mini Mission – II (MM – II) was dedicated to oil palm area expansion and productivity increases. MM – II of NMOOP was implemented in 12 States viz; Andhra Pradesh, Telangana, Chhattisgarh, Tamil Nadu, Kerala, Gujarat, Karnataka, Odisha, Mizoram, Nagaland, Assam and Arunachal Pradesh w.e.f. 01.04.2014.

In 2021, the government announced a National Mission on Edible Oils- Oil Palm. This mission, with a total outlay of INR 11000 crores, aims at making the country self-sufficient, by boosting the production of domestic oil palm. The mission plans to raise oil palm cultivation to one million hectares by 2025-26 and 1.7-1.8 million hectares by 2029-30. The mission has a special focus on the North-eastern region and the Andaman and Nicobar Islands.

What are impediments in boosting oil palm production in India?

Long gestation period and high level of investments: A palm is a monoculture crop with a long gestation period and requires a high level of investments. However, corporate sector investments in oil palm are limited compared to Malaysia and Indonesia.

Small landholding: Indian farmers generally have very small farm holdings which makes it non viable to produce oil palm. More than 80% of farmers have land holding of less than 2 hectare.

Environment Degradation: Production of oil palm sometimes requires clearing a vast tract of forest land which leads to environmental degradation and protests by environmentalists.

Exploitative Labor Practices: The labour working in Oil palm plantations are subjected to numerous hardships like poor pay, long working hours etc. due to the colonial hangover of plantation owners.   

What lies ahead?

First, India must engage in diplomatic talks with Indonesia to get a special exemption for importing palm oil. It should also approach Malaysia and enter into a long term purchase agreement with the second biggest player.

Second, India must diversify its edible oil mix which is mainly composed of soy and palm oil. Together, imported palm and soy oil (12 MT) account for close to half of India’s annual edible oil consumption.

Third, focus should be placed on enhancing domestic production by duly implementing the newly launched National Mission on Edible Oils- Oil Palm. Further, the government should give greater subsidies and support to oilseeds that are indigenous to India and suited for dryland agriculture. This can help achieve self-reliance without dependence on oil palm.

Fourth, India should cooperate with other big buyers of Palm oil so as to create a collective pressure on Indonesia for expeditiously removing the export ban.

Conclusion

The palm oil crisis and India’s high degree of import dependence for Oil palm is a wake up call for the nation to diversify its edible oil mix and significantly boost the domestic production. This is imperative for tackling any future disruption in oil palm supply and attain self reliance.

Source: Indian Express, The Hindu