Palm Oil Crisis in Indonesia

April 9, 2022

Indonesia, the largest producer, and exporter of palm oil is experiencing domestic shortages so much that the government has been forced to put curbs on shipments and introduce price controls.

Overview:

For the year 2021-22 (October to September), Indonesia’s palm oil production has been predicted to be 45.5 million tonnes (mt) according to the US Department of Agriculture (USDA).
This is around 60 percent of the world’s total production of palm oil.
The second-largest producer is Malaysia (18.7 mt).
Indonesia is also the world’s largest exporter of palm oil (29 mt) and Malaysia (16.22 mt) comes in second place.

The rise in oil prices in Indonesia

In Indonesia, the prices of domestic branded cooking oil have increased to 22,000 Indonesian rupiah (IDR) per litre from 14,000 IDR between March 2021 to March 2022.

Price capping by the government

On 1^st February, the government of Indonesia imposed a ceiling on the retail prices at 14,000 IDR for the premium 1, 2, or 5-litre packs and 13,500 IDR for the minimally-labelled less than 1-litre containers. These price caps caused the product to disappear from the supermarkets and reports of hoarding increased. The consumers had to stand in long queues to buy a pack. 14,000 IDR equals less than Rs 74 or USD 1.

Curbs on shipment

The government of Indonesia also made it compulsory for the exporters of palm oil to sell 20 percent of their shipments in the domestic market of the country. For these also the government set prices of 10,300 IDR per kg for RBD (refined, bleached, deodourised) palm olein and 9,300 IDR per kg for crude palm oil (CPO). From 10^th March, the domestic market obligation was raised to 30 percent.

Reasons for the palm oil crisis

There are two possible reasons for the palm oil crisis in Indonesia. The first is due to supply disruptions in other cooking oils like soya bean and sunflower. Russia and Ukraine together account for around 80 percent of the global sunflower oil trade and the crisis has caused a closure in exports. Also, the sanctions against Russia have also curtailed the sunflower oil trade. Soyabean oil is also facing supply issues due to South American dry weather. This is causing the low harvest of soyabean from Argentina, Brazil, and Paraguay. This supply crisis of sunflower and soyabean oil along with the war and drought has put a crisis on palm oil too.

The second factor is the use of palm oil as a bio-fuel. Since 2020, the government of Indonesia has made the 30 percent blending of diesel with palm oil mandatory to decrease fossil fuel imports. As palm oil is being used as a bio-fuel, there have been shortages in the consumer market.

Impact on India

The world’s biggest vegetable oils importer is India. The country imports 8-9 mt of palm oil annually with Indonesia being its top supplier. In 2021-22 Malaysia became the top supplier in the country. This crisis will also have an effect on India as the country will not be able to import huge quantities of palm oil from Indonesia unless the crisis ends.

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