In July 2014, CPO exports from Indonesia, the world’s largest producer and exporter of CPO, rose to 1.84 million metric tons (the highest level in seven months) on declining CPO prices. Demand from India and African countries was particularly high. The global CPO price declined as US farmers prepared to harvest a record soybean crop amid favourable weather conditions in the USA. Soybean oil and palm oil dominate the global market and account for about 60 percent of the world’s total production of edible oils. Both commodities can substitute one another, causing food processors to switch between both commodities as prices fluctuate.

As CPO prices have been extending the downward trend (and approach production costs), governments may decide to scrap CPO export taxes temporarily. For example, Malaysia scrapped the export tax for CPO for a period of two months on 4 September 2014 to support exports and reverse a decline in prices. Malaysia is the world’s second-largest producer of CPO. Indonesian Trade Minister Muhammad Lutfi recently stated that Indonesia would not implement such a measure (yet). However, as Malaysian CPO becomes cheaper due to the zero tax tariff, then many CPO importers (mostly from India and China) will turn to Malaysia instead of Indonesia in search for CPO, leading to a slowdown in Indonesian exports. As the country already has to cope with a wide current account deficit, Indonesia may need to take steps to protect its CPO exports. In September 2014, Indonesia’s CPO export tax stands at 9 percent. The duty is calculated by taking the average of CPO prices in Jakarta, Rotterdam and Kuala Lumpur. However, when the price falls below the level of USD $750 over a four-week period, then there is no duty.

Bloomberg noted that futures in Kuala Lumpur (the global benchmark) have fallen 21 percent in 2014 to 2,101 ringgit per metric ton on Monday (15/09). Prices touched 1,914 ringgit on 2 September 2014, the lowest level since March 2009. For the remainder of the year, price gains of CPO are expected to be limited due to the record US soybean crop and abundant CPO supplies.

CPO production in Indonesia is expected to increase this month due to the seasonal high output cycle that extends to October. However, due to forest fires on Sumatra (one of Indonesia’s main centers for CPO production) CPO production can be curbed. Indonesia’s National Disaster Mitigation Agency counted at least 176 hot spots on Sumatra.

The Indonesian Palm Oil Association (Gapki) targets a production figure of 25 million metric tons in 2014. Gapki may release August 2014 export data this week.

Indonesian Palm Oil Production and Export:

    2007   2008   2009   2010   2011   2012   2013   2014¹
(million metric tons)
  16.8   19.2   19.4   21.8   23.5   26.5    27.0    25.0
(million metric tons)
   n.a   14.2   15.5   15.6   16.5   18.1    21.2    21.1
(in USD billion)
   n.a   15.6   10.0   16.4   20.2   21.6    19.0    18.9

¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture