By Sashank Rajaram
As central banks around the world try their best to combat the rising inflation, the global edible oil crisis, caused by a variety of reasons, has unsettled the economic recovery. Amidst such uncertainties, the Indonesian government banned the export of all palm oil-related products. This article attempts to provide a deeper understanding of the issue in its entirety and the effects it might have on the world economy in the months to come.
The ongoing Russia-Ukraine war has upended the global economic recovery. With no end in sight, the war has shot up the prices of essential agricultural commodities to dizzying heights. Fearing a global food crisis, policymakers of the World Bank and the International Monetary Fund (IMF) have stressed (on) maintaining an adequate supply of grains, especially of wheat, as it constitutes a significant portion of the global diet. Yet, another crisis, something closer to our homes, caught the world off guard. From cosmetics to toothpastes to detergents, palm oil is a major ingredient in various products across the world. However, on April 28th, Indonesia, the world’s largest palm oil producer, imposed a blanket ban on exports citing rising costs and shortages within the country. Asserting that it is ‘one of the harshest steps’ taken by the government, the country’s Finance Minister, Sri Mulyani Indrawati, explained that the move was crucial to bring down the domestic price of palm oil. Though the ban was revoked towards the end of May, somewhat easing the situation, it undoubtedly sent shockwaves throughout the world market and exacerbated food security concerns. With inflation viciously gripping the world, what is the implication of the present edible oil crisis?
Behind the Scenes- Understanding the Context of the Ban
During the last five decades or so, vegetable oil has become a major source of fat, making it a significant component in diets across the globe. Apart from its nutritional values, it is also an integral cooking ingredient all over the world due to its availability as well as affordability. Therefore, with increased globalization, vegetable oils are heavily traded across the world, with imports accounting for 40% of global consumption. Consequently, more countries are exposed to vegetable oil shocks than other commodities such as sugar or cereals.
Therefore, beginning with the Russian invasion of Ukraine in February, the prices of vegetable oils, particularly sunflower oil, skyrocketed. With both countries contributing to more than 75% of the total supply, the war resulted in port closures and trade sanctions that prevented the bulk of harvest from leaving both countries’ borders. Moreover, the heavy fighting on the Eastern front in Ukraine destroyed many of the processing facilities, thereby completely disrupting the export of the oil. Commenting on the scenario, Nitin Kandal, the Rating Director of CRISIL said, “A protracted trade disruption [due to the war] will push edible oil processors to source more crude sunflower oil from Argentina.”
Unfortunately, that was not possible either. Catastrophic drought in South America led to a sharp decline in the production of soybeans, reducing alternatives and driving up prices. Countries such as Brazil, Argentina and Paraguay which are some of the biggest exporters of soybean oil recorded a decline in soybean yields, aggravating the crisis further. If that wasn’t enough, Malaysian palm oil production also declined in the past two years. With the locals turning away from the cultivation of palm oil which is viewed as ‘dirty work’, Malaysia had to rely on foreign, blue-collared workers for the cultivation. Accordingly, with the advent of the pandemic and subsequent restriction of worker mobility, the country had to face an austere labour shortage, leading to a fall in palm yields. To make matters worse, Canada, the largest producer of Canola (rapeseed) oil, also experienced droughts and intense heat waves that led to a decline in the export of canola oil by more than 20%. Therefore, when the entire world looked up to Indonesia to ramp up its production to bridge the excess demand and bring down the prices, the country’s shocking announcement of a blanket ban on all palm oil-related products added fuel to the metaphorical fire. fire, metaphorically.
The Ban – A Flash in the Pan
In Indonesia, Crude Palm Oil (CPO), a type of palm oil, is a staple cooking ingredient in their national cuisine. However, in the last few months, a variety of factors such as a) decline in the supply of alternative vegetable oils such as soybean and canola, b) lower palm oil production in Malaysia, and c) global food inflation due to the Ukraine-Russia war led to a dramatic rise in the price of CPO. As vegetable oils do not involve as heavy processing as other commodities, these high rates were translated into higher price tags for the consumers. For example, the price of branded palm oil rose from 14,000 Indonesian Rupiah (IDR) per litre to 22,000 IDR per litre within a month. Unsurprisingly, the sudden increase led to public agitation and resentment, especially as the price hike coincided with Ramadan and Eid al Fitr. Therefore, to ease the situation, the Indonesian government decided to implement price caps wherein the Maximum Retail Price (MRP) of branded palm oil could not exceed more than 14,000 IDR while local unbranded palm oil could not exceed 11,500 IDR. However, the price cap led to consumer hoarding, and the government had to enact rationing (two litres per person) and ink fingers to ensure that no buyer bought more than her/his scheduled purchase. To ease the excess demand even further, the government also introduced the Domestic Price Obligation (DPO) which necessitated exporters to sell 30% of the total export for domestic purposes.
Yet none of these policies served their intended purposes. Many experts believed the government-mandated price caps were well below the market equilibrium price, discouraging domestic producers from selling their produce. Furthermore, the shortage was aggravated partly because of a strict biofuel mandate by Indonesia, in which 30% of palm oil production was diverted to the production of B30, a green and cleaner diesel fuel (even though palm oil has environmental concerns in itself).
Therefore, after various unsuccessful measures to mitigate the problem, the Indonesian government finally took the radical step of enacting an embargo on palm oil export. The move, however, did not resonate well with economists, local producers, and the international community.
The Inevitable Impact
Due to the ban, countless palm oil farmers were deprived of the opportunity to sell their crops at a higher price. As a result, the farmers were forced to sell their output at a much lower price, though their input cost, particularly that of chemical fertilizers, has risen substantially. In a report by Al Jazeera, a farmer regretted, “It used to cost 300,000 rupiahs ($20.51) for 50 kilograms of fertilizer but now it costs more than 1 million rupiahs ($68). Where can you find a smallholder palm oil farmer who is going to be able to take care of their fields if the price of palm fruit is going down, but the price of fertilizer is soaring?”
Moreover, though in theory, the ban should help in making domestic supply abundant, it did not guarantee that the producers would sell their products when the prices were not conducive for them. This led some economists to opine that the government’s price cap created such disruption in the free market that gave the impression of nationwide shortages. Its hasty intervention to mitigate domestic food inflation did not just impact the Indonesian economy but also drove up the global edible oil prices further.
Needless to say, the effect of rising prices today has taken its toll on consumers and small businesses across the globe. In the United States, soybean prices have been soaring and are predicted to climb between 8.5% and 11.5% in the upcoming months. Europe’s food and beverage industries have been particularly affected by the crisis, which has forced them to shut down due to rising marginal costs. The situation is not much different in India either. As the largest importer of edible oil in the world, the Indonesian palm oil export ban has been a ‘double whammy’ for the country which was hoping to increase its import shipments to make up for the loss of alternatives. The mounting prices have severely affected the poor for whom food accounts for the biggest expenditure.
Talking about the ban, Atul Chaturvedi, President of the Solvent Extractor’s Association of India said, “This uncalled-for action had got massive repercussions for India. Local prices in Indonesia may fall as a result of this decision, but prices in India may sky-rocket. It is going to be a difficult time ahead.”
The Grim Future
Though the Indonesian government has allowed it to resume exports, shipments remain unlikely for now as the industry awaits detailed guidelines to secure domestic supply. Such uncertainty could have ripple effects throughout the global food economy and even threaten the food security of developing countries where edible oils have become essential. Considering the unprecedented situation, countries might deliberate temporarily halting their biodiesel mandates to ensure sufficient domestic supplies. Yet, such bans and trade restrictions also reveal a merging trend: when commercial interests conflict with the national interest, then the state will intervene to safeguard those interests. In other words, countries are pro-market only to a certain extent.
For India, the situation has exposed the country’s dependence on imports of vegetable oil. It might force the government to become proactive in its ‘National Mission on Edible Oil-Palm Oil’ that aims to boost domestic production of palm oil as well as look to diversify its import. Nevertheless, in the absence of Indonesia, no policy or alternative will be able to help fill in the excess demand in the near future. All in all, this cooking oil crisis will roast the kitchens and consumers should brace themselves for an unpleasant ride over the next few months.
Sashank Rajaram is a 1st-year Undergraduate student at Ashoka University, pursuing an Economics Major and Political Science Minor.
Image credits – Mint