Palm oil prices surge on Indonesia ban in risk to global food inflation

Palm oil rallied after top producer Indonesia said it will ban all exports of cooking oil, a surprise move that threatens to worsen global food inflation and aggravate volatility in crop markets still reeling from the war.

Indonesia said on Friday that the shipment halt will start from April 28 and last until the government deems a domestic shortage resolved. Benchmark palm oil futures jumped as much as 7% while Indonesia plantation stocks tumbled.

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. The ban threatens to further fan food inflation, which has been surging at a rampant pace, and raises the risk of a full-blown hunger crisis.

“The halting of shipments of the cooking oil and its raw material, widely used in products ranging from cakes to cosmetics, could raise costs for packaged food producers globally,” said Avtar Sandu, senior manager of commodities at Phillip Nova.

The surprise move has “left many questions unanswered especially as it comes at a time when other edible oils like sunflower oil supplies are facing issues due to violence in the Black Sea region,” Sandu added.

Palm oil futures for July delivery rose 7% to 6,799 ringgit ($1,564) a ton in Kuala Lumpur, the highest since March 11, while the nearby May prices climbed more than 9% to a record for the contact. Soybean oil, palm’s closest food and fuel rival, rose 1.9% in Chicago to trade near all-time highs.

Panic Button

Local shortages of edible oils has 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 al-Fitr is coming up. “People are excited to celebrate big time after two years of muted celebration due to the pandemic,” he added.

While limited supply and soaring prices are set to worsen inflation of food items like salad dressing and frozen pizza in wealthy economies like the U.S., developing nations like India are set to feel the worst impacts. Such countries depend on imports of palm oil as a cheaper alternative to more costly soybean, sunflower and canola oil.