Indonesia’s palm oil crisis

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.

  • But that is precisely the story of Indonesia vis-à-vis palm oil.

Key Details

  • The US Department of Agriculture (USDA) has estimated the archipelago’s palm oil production for 2021-22 at 45.5 million tonnes (mt). palm oil crisis
  • 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).
  • 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.

Plausible factors

  • 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.
    • 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).
    • Soyabean oil, too, is facing supply issues due to dry weather in South America.
  • 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.

Impact on India

  • India is the world’s biggest vegetable oils importer.
  • Indonesia has been India’s top supplier of palm oil, though it was overtaken by Malaysia in 2021-22.
  • The Indonesian government lifted its retail price caps on palm oil along with the 30% domestic market sale obligation on exporters. At the same time, it levied a progressive tax on exports, linked to a reference price for CPO.
  • The restrictions on exports, even in the form of levy, take into cognizance Indonesia’s higher population (27.5 crore, against Malaysia’s 3.25 crore) as well as its ambitious bio-fuel programme (Malaysia is still to fully implement even 20% palm oil admixture in diesel).

India and Palm Oil

  • In India, oil palm is being cultivated in 13 states.
  • Potential states are Andhra Pradesh, Gujarat, Karnataka, Tamil Nadu and Bihar.
  • Andhra Pradesh (83.5 percent) along with Telangana accounts for about 97 percent of India’s 278,000 tonnes of crude palm oil production.

Reference:

https://indianexpress.com/article/explained/express-explained-indonesias-palm-oil-crisis-7858818/

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