How Indonesia’s brief palm oil ban impacted the global food market

Climate change, COVID-19, and conflict in Ukraine have increased the demand for palm oil — and with it, the price. In reaction, the Indonesian government imposed a controversial export ban in April, only to lift it a month later. Threatening palm fruit farmers’ livelihoods and keeping products trapped at sea, experts say the ban put further strain on global food insecurity and may be a sign of other such measures to come.

“If countries institute export bans there is a significant risk that others follow suit, which will mean farmers don’t respond to higher output prices with increased supply, exacerbating and prolonging the crisis for all consumers,” Ian Mitchell, a senior policy fellow and co-director of development cooperation in Europe for the Center for Global Development, told Devex in an email.

It’s already happening, according to Andreas Harsono, a researcher covering Indonesia at Human Rights Watch. Malaysia imposed an export ban on certain types of chicken on June 1, while India took the same approach with wheat exports in May. “Many countries tend to be narrow minded, looking into their own national interests rather than seeing the problem as a global one,” he said.

According to the World Health Organization, over 30% of the global population currently lacks year-round access to adequate food, a situation exacerbated by recent events.

The pandemic disrupted Indonesia’s palm oil production — from palm fruit into crude palm oil, or CPO, via palm oil mills — while demand increased, said Mohammad Faisal, research director at the Center of Reform on Economics Indonesia. Droughts in places such as Argentina and Canada impacted the supply of other vegetable oils, such as soybean and canola, and meant many companies and countries turned to palm oil as an alternative.

Indonesia is the world’s biggest producer of palm oil — followed by Malaysia, Nigeria, Thailand, and Colombia — which is used as cooking oil, as well as in products ranging from cosmetics to cookies and bread to biofuel. Many Indonesians rely on it not just to cook for their families but also for their livelihoods.

One of the biggest factors affecting the price is Russia’s invasion of Ukraine, Faisal said. Ukraine is the world’s largest sunflower oil exporters, but it has been unable to export amid the conflict with Russia.

“Russia is the main problem here. … This is the main instability factor of this cooking oil crisis,” Harsono said.

The Food and Agriculture Organization’s global edible oils index has seen a 91% increase since June 2021. The rising price means cooking oil has become inaccessible to Indonesians, Harsono said.

Prior to the ban, palm oil prices reached 19,800 rupiah (then equal to $1.35) per liter in a country where the average wage is $6.46 an hour.

To tackle this, Indonesia’s government banned the export of CPO, as well as some of its derivatives, in the hopes the price would drop to 14,000 rupiah per liter, at which point it said the ban would be lifted. This was the latest in a range of measures brought in since December. But outraged farmers took to the streets protesting against the impact of the ban on their livelihoods.  As of May 19, three days before the ban was eventually lifted, the price sat at 17,000 rupiah per liter.

The impact at a national level

“Farmers [are] already suffering because of the increase of fertilizers because of the Ukraine-Russia war [and] increase in gas price,” said Bhima Yudhistira, director of the Jakarta-based think tank the Center of Economic and Law Studies. “They're being hit hard and as farmers they’re also consumers of cooking oil so when there is a price increase, as a household, they’re getting hit.”

According to APKASINDO, an association of Indonesian oil palm farmers, 25% of palm oil mills stopped purchasing the palm fruit from farmers during the ban, affecting their income.

“When there is a ban of CPO exports, the first reaction of the palm oil industry, especially the corporations, is to push the price of raw materials, or CPO, from the farmers further down,” Faisal said.

The ban was nothing new for Indonesia, said Françoise Nicolas, director of the Center for Asian Studies at the Paris-based French Institute of International Relations. It simply came “at a bad moment” when oils elsewhere were being affected by other factors, she said.

What is surprising, she said, is that the ban was lifted before the price had dropped. Instead, the government announced the implementation of a domestic market obligation that would require producers to sell a percentage of their product locally at a set price, while the Indonesian Bureau of Logistics, the country’s food procurement agency, will create a cooking oil stockpile.

The policy amendments have reportedly slowed down access to palm oil export permits, leaving the price still high, stores still full of palm fruits, and farmers unable to sell their product. In a bid to get things moving again, the government has lowered the maximum export tax and levy from $575 to $488 per metric ton and launched an initiative to see 1 million metric tons of palm oil products shipped by the end of July.

“It’s extremely harmful for Indonesia because this lack of consistency in policy is perhaps the thing that companies hate most,” Nicolas said. “They don’t like instability and Indonesia is very good at creating instability.”

At the time of the ban, shipments were being turned back to back to Indonesian ports; something Yudhistira called ridiculous “because they already engaged in a contract before the new policy.” He believes, as a result, many international CPO buyers may have turned to Malaysia. This could have repercussions for Indonesia’s economy. “[Indonesia] receives more than $3 billion from CPO exports, so when the government bans this total export there’s a loss of up to $3 billion,” he added.

COVID-19 already saw the country drop from upper middle-income to lower middle-income status and poverty levels rise by 0.4%.

International fallout

Ongoing restrictions, Mitchell believes, will play a role in worsening food insecurity currently being experienced worldwide by putting pressure not only on palm oil prices but also on substitute products like soy oil — and, in turn, soybeans, as well as alternatives such as grains.

“The fact that so many food commodity and energy prices are increasing simultaneously makes it harder for households to substitute away from price increases, exacerbating food insecurity all over the world,” he said.

Pakistan, for example, is one of the biggest importers of palm oil from Indonesia and has a population where almost 37%  are considered food-insecure. Jennifer Ankrom, Pakistan country director at Action Against Hunger, said that even with the resumption of palm oil exportation, the costs will be very high due to high demand.

There is a reliance, she said, on energy-dense foods in Pakistan, with 14% of the daily caloric intake coming from edible oil. AAH also provides nutritional supplements to children that contain edible oils.

“What we’re finding is the price of these products is increasing,” she said, adding that there’s concern that the government won’t be able to afford to take up some of AAH’s initiatives because of that higher price. “But there are children who, if they don’t receive this treatment, are likely to die.”

Mitchell called on policymakers to “be ready to support the countries most at risk from rising import bills, domestic production problems and hunger; and to provide macro-economic support for budgetary and balance of payments impacts in many lower-income countries.”