Will Indonesia's Ban on Palm Oil Exports Derail Renewable Diesel Growth in the U.S.?

April 25, 2022

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by Tyne Morgan (AgWeb) Soybean oil prices hit nearly limit up in overnight trading after Indonesia announced it will effectively ban palm oil exports as of April 28 due to soaring domestic prices.

While no timeline was given on the announced export ban, Indonesia said the ban on palm oil exports will be until further notice. The news sent soybean oil shooting higher, with CBOT hitting a record high of 83.21 cents per pound.

The Reality of Palm Oil Supplies

While some called the ban “totally unexpected,” Indonesia made a similar move earlier this year. In January, the country restricted palm oil exports, which was then lifted in March.

S&P Global Platts is questioning the duration and motivation of Indonesia’s palm oil export ban announcement. Peter Meyer of S&P Global Platts says, “A long-term ban could severely damage Indonesia’s economy given its reliance on palm oil exports. Additionally, this is not the first time Indonesia has announced this type of action since the war started in Ukraine, only to reverse course quickly.”

Meyer added that the proposed ban, which is slated to begin on April 28th, may ultimately result in increased exports tariffs, but not a total shutdown of exports.”

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Meyer also points out there’s no shortage of palm oil supplies in Indonesia today that would spur such a ban.

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The bigger concern is what this would mean for world trade considering the largest supplier of sunflower oil, Ukraine, is also facing an uncertain supply situation as the war continues.

The Black Sea region accounts for 60% of the world’s sun oil output, as well as 76% of exports. Considering so much of the world’s supplies comes from an area partially under siege, the uncertainty caused global vegetable prices to hit record highs already this year.

Food and Biofuels

According to Reuters, the measure could further inflame global food inflation that soared to a record high following Russia's invasion of Ukraine, raise costs for packaged food producers and force governments to choose between using vegetable oils in food or for biofuel.

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“But the problem there is we need more crush plants. Because in the U.S. at the moment, crush plants are kind of running at full capacity, and almost running to their capacity. If our math is right, we're going to need 25 billion pounds, and that's all the soy oil we produce on a yearly basis.”

Meyer says the latest announcement from Indonesia isn’t causing S&P Global Platts to change its timeline, as more U.S. crush plants are projected to come online in the next two to three years. READ MORE

Malaysia urges countries to prioritise food over fuel as Indonesia bans palm exports (Reuters)

Malaysia's biodiesel group opposes reduction of biofuel mandate (DevDiscourse)

Palm oil is in half your groceries. Here’s why prices might shoot up (CNN)

Indonesia: Ban on palm oil exports unlikely to last more than a month -- Indonesia produces around 4 million tonnes of palm oil every month and consumes around 1.5 million tonnes. (BusinessToday.IN)

Malaysian association argues against halting biodiesel mandate (Biofuels International)

Indonesia to tighten palm oil exports from January 1 -- Exporters will be allowed to ship six times their domestic sales volume, less than the current ratio of eight times. (Aljazeera)

Excerpt from Reuters: Countries should pause or slow use of edible oil as biofuel to ensure adequate supply for use in food, a state-backed Malaysian palm oil group said on Monday, warning of a supply crisis following an Indonesian ban on palm oil exports.

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Indonesia, the world’s top producer and exporter of the edible oil, sent shockwaves through the market on Friday when it announced it would impose a ban from April 28.

Global edible oil supplies were already choked by adverse weather and Russia’s invasion of Ukraine, and now global consumers have no option but to pay top dollar for supplies.

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Although Malaysia is expected to benefit from Indonesia’s drastic policies, producers face a pandemic-induced labour shortage and said they cannot fill the global supply gap.

Malaysia also needs to look at its stock and production forecast to ensure local demand is not neglected while fulfilling global demand, Ahmad Parveez said.

SELLERS’ MARKET

Investors have been anticipating Malaysia would bring in tens of thousands of migrant workers to staff plantations and boost production. However, the Malaysian Palm Oil Association (MPOA) said the influx of workers would raise production by only 1 million tonnes at most.

“The reality is, we can increase our production but this still wouldn’t be enough to meet world demand,” MPOA Chief Executive Officer Nageeb Wahab said. READ MORE

Excerpt from DevDiscourse: ... Malaysia should not cut its biodiesel mandate as it would lead to a crash in crude palm oil prices, a biodiesel producer group said on Tuesday, after Indonesia's export ban on edible oil spurred concerns over its use in fuel versus food.

The Malaysian Palm Oil Board (MPOB), an industry regulator, told Reuters on Monday countries should slow the use of edible oil as biofuel to ensure adequate supply for use in food, warning of a supply crisis following Indonesia's ban. "Any knee-jerk reaction to banning biofuels derived from vegetable oils would cause havoc in the global vegetable oil market," the Malaysian Biodiesel Association (MBA) said in a statement.

Malaysia is mainly an export-oriented market with a small domestic market, the MBA said. "As such, Malaysia should not reduce or stop its biodiesel mandate as the biodiesel industry hardly consumes 1 million tonnes of palm oil annually; against over 40 million tonnes used globally," it added.

Indonesia, the world's biggest exporter of the versatile oil found in everything from biodiesel to chocolates, plans from Thursday to stop shipments of refined, bleached, and deodorized (RBD) palm olein. It will allow exports of crude palm oil or other derivative products but said it is prepared to widen its ban if it faces domestic shortages of derivatives used in the production of cooking oil.

Indonesia and Malaysia are the world's top palm oil producers, accounting for around 85% of global output. Both countries make it mandatory for biodiesel to contain a certain amount of palm oil - 30% and 20% respectively - and just last month said they remain committed to those mandates, despite higher palm prices due to the impacts of the war in Ukraine. READ MORE

Excerpt from CNN: The Southeast Asian country is the world’s biggest palm oil producer, and Friday’s announcement sent prices of the commodity “berserk,” said James Fry, chairman of consultancy LMC International. Crude palm oil futures in Malaysia, a global benchmark, jumped nearly 7%.

The shock — and prices — subsided a little this week after Reuters and Bloomberg reported that the government would exempt crude palm oil from the restrictions. Indonesia’s agriculture ministry did not immediately respond to a request from CNN Business for comment.

But the restrictions are still expected to include palm olein, a more processed product which is used for cooking oil and makes up an estimated 40% to 50% of Indonesian exports, according to analysts. That would fuel inflation, just as global food prices hit all-time highs.

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Palm oil prices were already under pressure after Russia’s invasion of Ukraine, as markets scrambled to find alternatives to shipments of sunflower oil stuck in Black Sea ports. Ukraine is typically a major producer of sunflower oil, but that has been “completely messed up by Russia,” said Fry.

“We’ve got the perfect storm,” he added, noting that other factors, such as droughts in South America and Canada, had also constrained supplies of soybean oil and canola oil, respectively.

Why is Indonesia taking this step?

Indonesia’s leader, also known as “Jokowi,” said in a statement Friday that the decision to ban exports was to “ensure the national availability of cooking oil” and help keep it affordable.

Indonesians have had trouble getting access to the kitchen staple as global palm oil prices surged, leading the government to roll out cash subsidies, according to Antara, Indonesia’s state news agency.

The country had already taken other steps to protect local supplies. In January, it introduced a policy that required exporters of palm oil products to sell 20% of their total exports domestically, according to the US Department of Agriculture (USDA).

The retail price for cooking oil was also later “capped” at 14,000 Indonesian rupiah ($0.90) per liter, the agency wrote in a February update.

But the problem persisted, leading the government to take the drastic step last week to block exports.

Analysts say that authorities want to ensure there is enough supply of cooking oil ahead of the Muslim festival of Eid, which marks the end of Ramadan and will take place next week. Indonesia is home to the world’s largest Muslim population.

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India, which relies heavily on imports of vegetable oils, has already felt the impact of the recent shortages, according to B V Mehta, executive director of the Solvent Extractors’ Association of India.

He told CNN Business that people were turning to other ingredients, such as rapeseed oil and peanut oil, in response to the surge in prices of sunflower and palm oils.

Mehta is lobbying the Indian government to increase its own production of such commodities because of the “crisis” in food security.

“High prices have already taught us in the last two years to raise our own products and productivity, and with the Ukraine matter and now Indonesia … [it] has taught us a good lesson,” he added. READ MORE