Context: It’s rare for any country that is the largest producer and exporter of a product to experience domestic shortages of the same product — so much so as to force its government to introduce price controls and curbs on shipments.
Indonesia & Palm Oil sector
It has been estimated that Indonesia’s palm oil production for 2021-22 (October-September) at 45.5 million tonnes (mt).
That’s almost 60% of the total global output and way ahead of the next bigger producer:
Malaysia (18.7 mt). It is also the world’s No. 1 exporter of the commodity, at 29 mt, followed by Malaysia (16.22 mt).
Recent Crisis in Indonesia
The country has seen domestic prices of branded cooking oil spiral, from around 14,000 Indonesian rupiah (IDR) to 22,000 IDR per litre 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 to get a pack or two (14,000 IDR is less than $1 or Rs 74).
Besides domestic price controls, the government also made it compulsory for exporters to sell 20% of their planned shipments in the domestic market at pre-determined prices.
How does one explain this conundrum — consumers unable to access or paying through the nose for a commodity in which their country is the preeminent producer and exporter?
There are two possible reasons.
The first has to do supply disruptions — manmade and natural — in other cooking oils, especially sunflower and soyabean.
Ukraine and Russia together account for nearly 80% of the global trade in sunflower oil, quite comparable to the 90% share of Indonesia and Malaysia in palm.
Russia’s invasion of Ukraine on February 24, which is ongoing, has resulted in port closures and exporters avoiding Black Sea shipping routes.
Sanctions against Russia have further curtailed trade in sunflower oil, the world’s third most exported vegetable oil (12.17 mt, according to USDA estimates for 2021-22) after palm (49.63 mt) and soyabean (12.39 mt).
Supply tightness in sunflower and soyabean — from war and drought, respectively — has, in turn, transmitted to palm oil
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.
Such diversion has become all the more attractive with Brent crude prices hardening post the Ukrainian war — to a closing high of $127.98 per barrel on March 8 and staying elevated at $100-plus levels.
What is the impact on 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 has been India’s top supplier of palm oil, though it was overtaken by Malaysia in 2021-22.
India will have to get used to lower supplies from Indonesia.
