Palm oil prices look set to decline throughout the rest of 2022. But why? Revolutionized's Emily Newton reports.
Palm oil, the world’s most widely used cooking oil, derives from the fruit of the oil palm tree. Crude palm oil and palm kernel oil are two different varieties of oil that come from the oil palm fruit. They’re made with two different processes – crude palm comes from the flesh of the fruit and palm kernel oil is made by crushing the kernel to release the oil.
Oil palm trees are incredibly productive crops, and they offer a higher yield at a lower cost than other types of vegetable oils. As a result, oil palm plantations are common in Africa, Asia, and Latin America.
While oil palm trees grow in many tropical climates, the two countries that produce the most palm oil and dominate the world market are Indonesia and Malaysia. For example, out of the 72 million tonnes of palm oil produced in 2018, Indonesian production accounted for 57% and Malaysia’s market accounted for 27%.
What Is Palm Oil Used For?
Palm oil is the most widely used cooking oil in the world. In most cases, oils like palm oil and vegetable oils need to be hydrogenated to increase the melting point and improve the final product’s stability. While you may not have it in your pantry at home, it’s a key ingredient for products in many industries, including:
- Food: Palm oil is highly saturated, so it’s a good substitute for butter or hydrogenated vegetable oil. Products like ice cream, chocolate, and even bread contain palm oil.
- Beauty: Palm oil is a key foaming agent for practically every soap, shampoo, and detergent. It’s also often a key ingredient in makeup and lotion.
- Biofuel: Palm oil can also be used as an element in creating biofuels. Europe, for example, uses much of its palm oil imports to create biofuel for cars and trucks.
Why Is the Price of Palm Oil Declining?
The price of palm oil is declining fairly rapidly in the market, and it has been doing so for some time now. According to Fitch Ratings, crude palm oil prices declined by $300 per tonne. In another report, palm oil suffered a sharp decline between April and June, hitting an all-time low in mid-July.
The reasons for this price decline are multifaceted.
1. Increased Demand for Vegetable Oil
One of the reasons for the decrease in palm oil prices is an increase in the demand for other types of vegetable oil. Many consumers have reservations about the impact palm oil production has on the environment, resulting in an increase in demand for other types of oil.
2. Indonesia’s Shifting Export Policies
In early 2022, Indonesia implemented a shipment ban for palm oil in an attempt to curb food inflation and decrease the surging prices of cooking oil. However, these policies created an excess supply of palm oil, as sales could not keep up with production. In the end, the only thing Indonesia’s export ban accomplished was eroding demand and impacting the market, resulting in a sharp decline in prices.
3. High Prices Hitting Demand
Inflation is running rampant in practically all markets. As most of the world enters a recession, prices for many products and services are skyrocketing. Unfortunately, a result of these high prices in the palm oil industry is that demand has taken a hard hit. With lower demand, the industry has suffered a sharp decline in prices throughout the second quarter of 2022.
Future Trends in the Palm Oil Industry
According to economists at Bloomberg, the future trends for the price of palm oil look like they’ll follow similar trends. Palm oil’s benchmark futures have slumped by 45%. As a result, prices should continue to drop.
Unlike many other food shortages around the world, palm oil has seen a boom in production, made worse by Indonesia’s export ban. Now, there are huge stockpiles of palm oil that need to be sold off. Fortunately, however, some see this as an opportunity and expect the market to turn to palm oil again, resulting in an uptick in demand.
International unrest, such as the war in Ukraine, and food price inflation, will continue to impact many industries, including palm oil production and pricing. Looking ahead, there are bound to be more interesting twists and turns in the market.