A worker checks the quality of crude palm oil (CPO) in a state CPO processing unit at Indonesia's North Sumatra province
A worker checks the quality of crude palm oil (CPO) in a state CPO processing unit at Indonesia's North Sumatra province May 29, 2012. Reuters / Stringer Indonesia

The decision by Indonesia -- the world's biggest producer, exporter, and consumer of palm oil --to halt the export of crude palm oil has threatened global vegetable oil supplies, fuelling global inflation further at a time of soaring commodity and food prices across the world due to the Ukraine crisis.

Indonesian finance minister Sri Mulyani Indrawati said the ban, which would come to effect from April 28, was imposed to stabilize cooking oil prices in the country, calling it necessary nonetheless.

Food prices rose by nearly 13 percent globally in March, according to the United Nations Food and Agriculture Organization. At the spring meetings of the World Trade Organisation, World Bank, and International Monetary Fund in Washington on April 22, they had urged countries to refrain from exercising export controls.

Palm oil is the world's most widely used vegetable oil with global production estimated to be 77 million tonnes for the current year. Indonesia and Malaysia account for 90 percent of the global palm oil production and Indonesia leads the pack with the largest quantity at over 45 million tonnes in 2021.

Palm oil is handy for thousands of products from food to personal care objects and biofuel. Palm oil is a key commodity for making toilet soaps, shower gels, hand washes, shampoos, oral care products, and processed food products such as noodles, biscuits, and frozen desserts. The commodity is cheaper compared with other edible oils, and hence hotels, restaurants, and caterers largely depend on it.

Prices of palm oil have been skyrocketing for two years now due to the global shortage of the commodity and have jumped 50 percent in the last 12 months and nearly tripled over two years.

The key price drivers are weather conditions in top palm oil-producing nations, demand-supply mismatch, and demand for palm-based biodiesel, especially in Indonesia and Malaysia. Higher shipping costs and supply chain disruptions have also affected its prices.

Russia is a handy source of commodities, both energy, and agriculture. Russia and Ukraine produce and supply 30 percent of wheat and 20 percent of maize to the global market. They also account for three-quarters of sunflower supply and one-third of barley supply in the world. Russia enjoys a near-monopoly in supplying fertilizers to South American nations.

The global market was hoping for a bumper sunflower crop from top exporter Ukraine, but supplies from Kyiv dried up because of Russia's special operation in the country. A supply shortage of edible commodities like sunflower oil and soyabean oil due to the Russia-Ukraine conflict has also led to an increase in the prices of palm oil.

This is happening when export tonnages of all other major oils are hit: soya bean oil following droughts in South America; rapeseed oil due to disastrous canola crops in Canada; and sunflower oil because of the Russian invasion of Ukraine.

The move by Indonesia will increase costs for packaged food products churned out by global majors like Nestle, Mondelez International, and Unilever Plc as products like biscuits, noodles, cakes, and ice cream are set to become dearer. As far as top importers like India and China are concerned, they are at the risk of inflation due to the hike in import costs.

Indonesia imposed the ban as the largest Muslim country in the world is heading towards the Eid al-Fitr holidays. The shortage of edible oil has led to street protests and turned into a key political issue for President Joko Widodo. Currently, Indonesia with the fourth-largest population on earth has halted exports of processed RBD palm oil, while shipments of crude palm oil can continue.

Indonesia, much like most of the world, is grappling with inflation and a shortage of palm oil. To bring down the rising food prices and plug the supply shortage, Indonesia imposed a ban on the export of the commodity on April 22.

After the rise in palm oil prices caused worries for the Indonesian government, it made a series of interventions over the past few months. They include capping local prices, providing higher subsidies, hiking export duty, and controlling exports through surveillance.

Given that Indonesia is the second-largest exporter of the commodity to India the move may fuel further inflation in the country.

Palm oil accounts for nearly 40 percent of total edible oil consumption in India and 60 percent of its imports. India, the second-largest consumer of vegetable oils globally accounts for more than 10 percent of global demand, and imports less than 50 percent of its palm oil needs from Indonesia. Indonesia also supplies nearly 80 percent of palm oil for Pakistan and Bangladesh.

After the Indonesian ban comes into force, skyrocketing food prices will become part of the global economic, social, and political fabric.