Top palm oil producer Indonesia to ban some exports

Dive Brief:

• Prices for edible oils whipsawed over the weekend after Indonesia — the largest producer of the food commodity in the world — announced plans for an export ban of palm oil starting April 28. Although the government initially said Friday it would ban all palm oil exports, it has since restricted the ban to bulk and packaged refined, bleached and deodorized (RBD) palm olein, a processed version used as a cooking oil that makes up to 40% of Indonesia’s total palm oil exports, sources told Bloomberg.
• Indonesia said the export ban would continue until it was satisfied with domestic availability and affordability of the cooking oil. Upon news of the export ban, prices for soybean oil, a popular substitute, hit a record high on the Chicago Board of Trade on Friday, only to reverse course after reports of a narrowed focus on RBD palm olein over the weekend.
• The Indonesia export ban on RBD palm olein comes as the broader edible oil market has been hit by a series of inflationary events, including poor weather and labor shortages in key crop growing countries, rising global demand and the war in Ukraine.

Dive Insight:

The export ban of RBD palm olein ratchets up Indonesia’s efforts to address a crisis of rising inflation and supply shortages in the country. In January, Indonesia issued a short-term mandate requiring domestic producers of palm oil to set aside one-fifth of their shipments for local buyers, and implemented a retail price cap at home. The weight of global demand shifted to countries like Malaysia, the second-largest producer of palm oil, and to alternatives like soybean oil.

Supplies of soybean oil, however, have been pressured by a drought in Argentina, the top global exporter. In its own protectionist move, the South American country raised export taxes on soybean oil in March and briefly suspended exports after Russia invaded Ukraine.

The war in Ukraine has also compromised a key source of sunflower oil. Ukraine and Russia produce 80% of the ingredient.

In April, the Food Agriculture Organization of the United Nations reported its vegetable price index rose more than 23% in March to hit a new record, pressured by higher prices for palm, soy, sunflower and rapeseed oils. A basket of the most commonly used vegetable oils by food manufacturers in the U.S. currently costs 41% more than a year ago, with prices 151% higher over the past two years, according to an analysis by Gro Intelligence,

Several of the largest food manufacturers are major buyers of palm oil. Mondelēz International, maker of Oreo and Chips Ahoy cookies and Ritz crackers, alone makes up for 0.5% of global palm oil consumption, according to its website, and sources most of its supply from Indonesia and Malaysia.

Unilever, whose brands include Magnum ice cream and Hellman’s mayonnaise, as well as several health and beauty labels, used 1 million tons of crude palm oil and derivatives in 2016, the most recent data available, Reuters reported. Nestlé, which makes Kit Kat abroad in more than a dozen countries, sourced 453,000 metric tons of palm oil and palm kernel oil in 2020, mostly from Malaysia and Indonesia. And Ferrero, which uses palm oil as a key ingredient in its Nutella chocolate hazelnut spread, sourced about 85% of its supply from Malaysia and less than 9% from Indonesia in the first half of 2021, according to its most recent palm oil supply report.

Indonesia’s export ban will further complicate CPGs’ efforts to keep food prices low, said Ramsey Baghdadi, a consumer analyst with research firm GlobalData. 

“Consumers continue to be sensitive towards prices, as economic uncertainty proves to be a key influence on their decision making,” Baghdadi said, citing GlobalData research that 60% of consumers globally claim to be extremely or quite concerned about their personal finances.

“Manufacturers will need to focus on price promotion strategies to keep prices down and maintain a good relationship with customers,” he said.