Palm oil slumped on prospects that top producer Indonesia's surprise ban of cooking oil exports will not be strict as feared.
Indonesia will only halt exports of bulk and packaged RBD palm olein, a higher value product that has been processed. Exports of crude palm oil and RBD palm oil will still be allowed, according to people familiar with the matter. RBD olein accounts for 30% to 40% of Indonesia's total palm oil exports.
Benchmark futures initially rallied after Indonesia said Friday that a shipment halt on all cooking oil will start from April 28 and last until the government deems a domestic shortage resolved. The announcement came as a shock to the market as a complete ban would worsen global food inflation and aggravate volatility in crop markets still reeling from the war.
Palm oil for July delivery tumbled as much as 4.1% to $1,399 (6,097 ringgit) a ton in Kuala Lumpur after jumping 7% in early trade. Prices closed 2.1% lower. Soybean oil, palm's closest rival, retreated from all-time highs in Chicago.
"Details are still scant for now, and traders are reacting on speculation that the impact of the Indonesian ban may be less than initially thought," said David Ng, senior trader at IcebergX in Kuala Lumpur. It will be a slight reprieve for the ban to be limited to olein and not other products, he added.
Fruits of the oil palm tree are crushed to produce crude palm oil. Processing crude palm oil produces refined, bleached and deodorized palm oil, which can be further processed into RBD palm olein. RBD palm olein is primarily used as cooking oils and in industrial frying of processed foods.
The move by Indonesia, which accounts for a third of global edible oil exports, adds to a raft of crop protectionism around the world since the war erupted in Ukraine, as governments seek to protect their own food supply with agriculture prices surging. While the ban excludes some products, it still risks further fanning food inflation, which has been surging at a rampant pace.
Local shortages of edible oils have roiled Indonesia, leading to street protests over high food prices and the detention of a trade official in a corruption case. Managing food prices is a key priority for President Joko Widodo especially as the country that's home to the world's largest Muslim population heads into the Eid al-Fitr holiday, usually marked with feasts and celebration. Just days earlier, the industry ministry said distribution of its domestic cooking oils has met national demand, which makes the export ban even more unexpected.
The shortage of domestic supply at retailers, high palm oil prices and strong festive demand may have "triggered the government to press the panic button," said Sathia Varqa, owner of Palm Oil Analytics in Singapore.
Although inventories are swelling after Indonesia's export curbs in February and March, there are still problems in the flow of cooking oil from refineries to packaging companies down to retailers, he said. This is hitting availability just as Eid ul-Fitr is coming up. "People are excited to celebrate big time after two years of muted celebration due to the pandemic," he added.
Global standing
It's safe to say that palm oil doesn't have a cracking reputation. From the British supermarket ad about an orphaned and homeless orangutan to food and cosmetics products loudly labelled with "no palm oil" stickers, it is widely portrayed as the bad boy of the veggie oil industry.
That said, it is the most widely produced, used and traded edible vegetable oil out there. And because it's so versatile, not to mention lucrative, more and more forested areas have been cleared to make way for places to grow it. Particularly in Indonesia and Malayisa, which collectively produce the vast majority of the world’s palm oil.
And that's not exactly good for the environment. In fact, it's disastrous.
Because when tropical rain forests are cleared, it destroys the habitat of many different species. In addition, trees and soil help us store carbon — essentially working as a carbon sink. And we need them to help absorb the abundance of CO2 we're still producing.
Why not just stop using palm oil?
It looks many will have to cut down on their palm oil consumption because Indonesia, the world's largest exporter, has now announced that it will no longer be selling its stocks for export. The move is designed to counter the rising prices of domestic cooking oil. Edible oil prices have been going up worldwide ever since Russia and Ukraine, both sunflower oil exporters, went to war.
Last year Sri Lanka banned imports of palm oil, while also introducing plans to phase out its own plantations and replace them with rubber or other environmentally friendly crops.
But, given the myriad uses of palm oil, getting rid of it altogether might be easier said than done. Far from just being the evil ingredient in our much-maligned chocolate spreads, it also sneaks its way into our cosmetics, pharmaceuticals, our industries, our favorite snacks and our cars.
In fact, Europeans use it keenly as a source of biofuel. And far from being a green alternative to fossil fuels, palm oil diesel actually releases up to three times as many emissions as its petroleum-based alternative. Not ideal.
A couple of years ago, the European Union decided to ban palm oil as a biofuel. But within months, Indonesia and Malaysia had lodged complaints against the European directive with the World Trade Organization. Now the bloc is aiming to phase out palm-oil based fuels by 2030.
Why can't we just use different veggie oils?
It's complicated. Even though cultivating palm oil crops has led to deforestation and to some instances of draining and burning peatland in Southeast Asia, oil palms (which confusingly are the trees on which palm oil fruits grow) have a relatively high crop yield. That means we get a lot of oil from a small patch of land.
If, however, that land were given over to other crops that don't yield as much, we would likely need a greater area on which to grow alternative oil-producing crops. Up to nine times as much, according to the International Union for Conservation of Nature (IUCN). And that would potentially lead to even more deforestation.
Where does that leave us?
The best question yet ... and a difficult one.
Greenpeace and other environmental groups are pushing for government legislation instead of industry certification, which they say dumps the "responsibility to assess the quality for a certified product onto the customer."
In having official regulations, they reckon that there is a greater chance that the products we eat and use will not come at the cost of environmental destruction and violations of human rights.
In the meantime, business owners can also do their bit by checking to ensure that no one along their supply chains is contributing to deforestation.
As for the rest of us, we can find out which of the products on our shopping lists contain palm oil and check whether companies are keeping their promises. And we can make noise to push for greater transparency and cleaner products.
