The Indonesian Palm Oil Association (Gapki) stated that exports of Indonesian crude palm oil (CPO) and its derivatives have increased 13 percent to 1.79 million tons in March 2014 from 1.58 million tons in the previous month. The increase was particularly due to a surge in the price of soybeans since February which makes importers shift their focus to CPO and its derivatives as a substitute for soybeans. Moreover, CPO prices have risen due to speculation about the looming El Niño cycle and declining stockpiles in Indonesia and Malaysia.
Soybean oil and palm oil dominate the marketplace and account for approximately 60 percent of the total world production of edible oils. Both commodities can substitute one another and therefore food processors tend to switch between the two as prices fluctuate. The world soybean production is centered in the USA, Brazil and Argentina, while the world's palm oil originates mostly from Indonesia and Malaysia. Together, these two countries account for almost 90 percent of total global CPO production.
Executive Director of Gapki, Fadhil Hasan, said that the average global soybean price rose 5 percent to USD $876,66 per bushel in February 2014 and then by 6.3 percent to USD $925,54 per bushel in March 2014. As such, the current soybean price is regarded as being overvalued, causing importers to switch to CPO and its derivatives.
Remarkable growth in demand for Indonesian CPO came from Africa and Pakistan, growing 59 percent and 197 percent (month-on-month) respectively in March 2014. The huge demand from Pakistan is caused by the country's preparations for Islamic festivities (the holy fasting month of Ramadan and Idul Fitri). Indonesia's traditional main export markets for CPO are India, China and the Eurozone. Indonesian CPO exports to China grew by a modest 10.6 percent in March 2014 as Chinese importers receive less credit amid the slowing economy of the world's second-largest economy.
The global average CPO price in March 2014 was USD $961 per ton, a 6 percent increase from the previous month. The price increase was due to increased speculation about a new El Niño cycle in 2014 as well as lower CPO stockpiles in Indonesia and Malaysia. El Niño is a weather phenomenon that occurs once every five years on average and involves periodical warm ocean water temperatures off the western coast of South America which can cause climatic changes across the Pacific Ocean. Australia's Bureau of Meteorology stated at the beginning of April 2014 that chances of the arrival of a new El Niño cycle this year are estimated at more than 70 percent. The cycle causes less rainfall in Southeast Asia and Australia and thus results in declining production of agricultural commodities in countries such as Indonesia, Vietnam and Thailand (moreover it can spur forest fires). Affected commodities include CPO, cocoa and coffee. Gapki official Joko Supriyono said that CPO production in Indonesia and Malaysia in the last three months have declined by 10 percent due to droughts.
Fadhil Hasan said that Indonesia's export volume this year will be similar to last year's result because of the government's biodiesel program. This program involves the raising of the mandatory amount of palm oil (fatty acid methyl ester) blended in biodiesel from 7.5 percent to 10 percent. For power plants that use biodiesel the amount has been increased to 20 percent. Through this program, the Indonesian government aims to curb expensive oil imports thus easing pressures on the country's wide current account deficit. State-controlled oil and gas company Pertamina is expected to absorb 2.4 million metric tons of CPO this year for the biodiesel program.
The improving global economy has not impacted much yet on export volumes of Indonesian CPO in March 2014 as exports to India and China have not shown a marked improvement.
Indonesian Palm Oil Production and Export:
(million metric tons)
(million metric tons)
(in USD billion)
¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture