The good, the bad and the ugly of Indonesia’s palm oil ban

Indonesia is placing a ban on oil exports - a move that could further elevate global food markets already shaken by the conflict in Ukraine and adverse weather. 

President Joko "Jokowi" Widodo's announcement of the export ban last week comes after his government faced pressure to contain the cost of household necessities made from palm oil, the world's most widely used vegetable oil.

On April 27, the chief economic minister announced that it would widen the scope of its export ban to include crude and refined palm oil, which are crucial for goods ranging from shampoos to chocolates to bread, leaving markets in shock.

The devastating impact on global food prices

When the conflict in Ukraine broke out in February, vegetable oil prices soared as Russia and Ukraine combined to account for about 80 percent of the global sunflower oil market. 

But with more than a third of the total global export share, Indonesia dominates the world's vegetable fats and oil production, which means the ban would fuel inflation.

And this will happen just as global food prices have already hit an all-time high.

World food prices jumped to their highest levels in March, the Food and Agriculture Organization of the United Nations (FAO) said earlier this month. 

"War in the Black Sea region spread shocks through markets for staple grains and vegetable oils," the report said.

The most recent FAO Food Price Index was 33.6 percent higher than in March 2021.

And although Indonesia's decision to ban exports is to "ensure the national availability of cooking oil" and help keep it affordable, the country will also feel the hit.

According to Trinh Nguyen, a nonresident scholar in the Asia Program at the Carnegie Endowment for International Peace, Indonesia will likely see its trade position deteriorate after banning the export of its top-earning product.

"It will bring in fewer export dollars while still importing more goods that are getting more expensive," she said. 

"After the ban was announced, the Indonesian rupiah dropped to an eight-month low, as markets expect export earnings to decline. By trying to protect its most vulnerable citizens, Indonesia inadvertently increased the costs of imports through the depreciation of its currency and likely created higher price spikes."

What is palm oil?

Palm oil, made from the fruits of trees called African oil palms, is a common ingredient found in most food, cosmetics and household items. The World Wide Fund for Nature estimates that it's used in nearly 50 percent of all products in supermarkets.

It also has a bad reputation. Palm oil is primarily associated with tropical deforestation, climate change, loss of habitat for endangered species, and the displacement of local communities.

In addition, the burning down of forests to create space for palm oil production also contributes to climate change.

It is often claimed that palm oil should be banned, and several large food-processing companies have switched to other vegetable oils. But the WWF says that choosing another oil would shift the problem to another area.

"To get the same amount of alternative oils like soybean, coconut, or sunflower oil you would need anything between four and 10 times more land, which would just shift the problem to other parts of the world and threaten other habitats, species and communities."

Will the ban last?

As Indonesia has limited infrastructure to store the surplus oil and might face mounting pressure from buyers to resume shipments, Jakarta's ban on palm oil exports is unlikely to last more than a month, industry officials told Reuters news agency. 

Indonesia currently holds about 5 million tonnes of palm oil stocks. The country's storage capacity of around 6-7 million tonnes would be full by the end of next month, a Singapore-based dealer with a global trading firm said.

"As the domestic cooking oil market is not enough to absorb all the production, a more extended ban may hurt the industry, particularly the smallholders," said Carolyn Lim, senior manager, corporate communications at Musim Mas, a palm oil producer with plantations in North Sumatra.

In 2021, Indonesia consumed 18.4 million tonnes of palm oil out of total production of 51.3 million tonnes, GAPKI estimates.

"Based on simple calculation, even before one month, all the tanks would be full if it's a total ban," said Eddy Martono, secretary general of GAPKI, Indonesia's biggest palm oil association.

Once tanks run out of space, mills can't process the fresh fruit bunches, which would rot and force production to drop, Martono said.