Plans to increase the amount of palm oil in Indonesia’s biodiesel fuel supply should support global vegetable oil prices, which in turn should support canola values.
But other issues also affect vegetable oil prices, so it’s not certain that values will rise.
Indonesia is the world’s largest palm oil producer and exporter.
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It already has a mandate that sees biodiesel contain 35 per cent palm oil.
It plans to increase that to 40 per cent at the start of 2025, and its new president has talked of raising the blend further to 50 per cent.
Indonesia, the world’s fourth most populous country with a population of 282 million, held an election this year.
A former general, Prabowo Subianto, 73, easily won the presidency on a campaign of building up national industry and eradicating corruption and poverty.
He has said that moving to a 50 per cent blend would reduce Indonesia’s imports of crude oil, keeping at home US$20 billion a year that would otherwise go to overseas oil exporters.
Eddy Matron, chair of the Indonesian Palm Oil Producers Association (known as GAPKI), said at a news conference last week that he favours increasing the palm oil blend but warned it had to be done cautiously to avoid spiking palm oil prices.
He said the move to B40 would result in palm oil exports dropping by two million tonnes a year, and a move to B50 would caused a reduction of six million tonnes, assuming palm production stays the same.
Indonesia currently exports about 26 million tonnes of palm oil, or about 53 per cent of total global palm oil exports. Dropping six million tonnes would amount to a 12 per cent decline in global palm oil trade.
That would cause global vegetables oil prices to rise, causing hardship for consumers.
He said the government should increase funding for a program that encourages small holders to replace old, low-yield palm trees with new trees to increase production.
However, deputy agriculture minister Wamentan Sudaryono, in comments made this fall and carried on the Palm Oil Producers Association website, said implementing B50 might depend on trade issues.
There are concerns around the world, and particularly in Europe, that the growth of palm plantations reduced the size of tropical forests in Southeast Asia.
Europe imports a fair amount of palm oil for its own biofuel, but in 2018 the European Union adopted a law that discourages the use of biofuel crops that it deems environmentally unsustainable. By 2030, unsustainable biofuel would be banned.
Indonesia and Malaysia, the second largest palm oil producer, each took the EU to the World Trade Organization over this, saying the rule discriminates against palm and unfairly favours rapeseed oil and soybean oil produced in Europe.
Indonesia says palm oil can be produced sustainably and has created certification systems to identify palm plantations that it says are environmentally sound.
Earlier this year, the WTO provided a mixed ruling that said the EU could make rules about imports of biofuel crops based on environmental standards but that the way the EU assessed the sustainability of palm oil was flawed and unfair.
It is not clear yet how palm oil trade will be affected. The EU’s Deforestation Regulation still exists. The EU and Indonesia have set up a task force to discuss the issue.
However, there is potential that trade could be restricted by the start of 2025, especially for small, individual palm producers who find it difficult to become certified.
So deputy minister Sudaryono’s comments appear to be designed to calm small producers. If their production faces trade barriers, then Indonesia would bring in B50 and use more product domestically to produce fuel.
This way it would prevent a build-up of unused stocks to keep prices stable.
So to me, this means the shift to B50 is to be held in reserve as a backup in the event of trade problems.
However, even the planned move to B40 would reduce the amount of palm oil on world markets, and the gap would have to be filled by some other vegetable oil.
Already, the supply of palm is slightly tight because production is held back by too many old trees and weather problems.
Palm oil is usually the cheapest vegetable oil in the global marketplace, but this autumn palm is priced higher than soybean oil.
This is mostly because of weakness in soy oil rather than soaring palm oil. Palm has rallied since the end of August to the highest in more than a year but is still well below the highs reached in spring 2022, when many commodities soared amid worries about Russia invading Ukraine.
Another development affecting the market is India hiking import duties on unrefined vegetable oils to 20 per cent to protect its oilseed farmers. It is not clear yet how this will impact India’s demand.
