Effects of Indonesia’s palm oil export ban still uncertain

A tight vegetable oil market just got a whole lot tighter but it may not have much impact on already sky-high canola prices, says an analyst.

Indonesia has banned the export of certain types of palm oil effective April 28.

Traders were initially stunned that a country responsible for 56 percent of world palm oil exports was completely shutting down trade of the commodity.

But the initial announcement made on April 22 that exports of cooking oil and its raw material would be halted turned out to be misleading.

The government clarified on April 25 that the ban would only apply to refined, bleached and deodorized (RBD) olein exports, which account for 30 to 40 percent of the country’s total palm oil shipments, according to a Bloomberg report.

Ken Ball, an analyst with PI Financial Corp., said there is a difference between regular RBD oil and RBD olein oil, which is a more refined product used in industrial frying applications.

The market is relieved that it is not a complete ban because vegetable oil supplies are already extremely tight due to falling global soybean ending stocks, a poor Canadian canola crop and severely restricted sunflower oil exports due to the war in Ukraine.

The partial ban adds fuel to the vegetable oil fire, but he doesn’t think it will result in higher canola prices.

“November canola is wildly overvalued already, so it’s hard to tell how much impact it will be able to have,” he said.

Soybean oil prices are the benchmark for canola seed prices and November canola is “massively overpriced” compared to Chicago soybean oil futures.

“That’s not something that is going to be able to persist because crush margins are disastrously low right now and the crushers aren’t going to allow that to persist,” said Ball.

“The market is trading as if we’ve already got a bad crop coming and of course we don’t. We’re actually headed for probably a pretty darn good start for our crop year.”

Canola prices are already “stratospheric” and are unlikely to respond much to Indonesia’s palm oil export restrictions, he said.

Indonesia’s export ban is aimed at keeping a lid on food price inflation.

Ball thinks there is another culprit for high vegetable oil prices in the country. Indonesia moved to a 30 percent nationwide biodiesel mandate in 2020 from a 20 percent mandate.

He believes that is a “ridiculously careless” blend level that is driving up the price of palm oil for food markets and it should be reduced.

But the government appears to be doing the opposite. It has plans to implement a 40 percent mandate and is conducting road tests at that blend level.

It is uncertain when the government intends to implement its proposed B40 mandate but it is unlikely to be before 2023, according to the United States Department of Agriculture’s Foreign Agricultural Service.

Tags: canola prices, export, Indonesia, Vegetable Oil, palm oil, cooking oil, Market, olein, banned