3 Challenges Facing the Edible Oil Market in 2023

Indonesia’s Biofuel Mandate

Starting in Indonesia, the world largest producer of palm oil, where efforts to combat high prices for crude oil will impact the nation’s contribution to the edible oil export market. In late 2022, President Joko Widodo’s government announced that the B35 biofuel mandate would come into effect on February 1st 2023. The ruling means that any diesel sold in Indonesia from February onwards is required to contain at least 35% fuel derived from vegetable oils, which in Indonesia will be almost exclusively palm oil. Blended fuels are commonplace across the world, with many nations requiring B5 or B10 blends in all gasoline or diesel sold, however the B35 mandate will be the highest blending obligation in the world. Biofuel blends are often implemented as they are considered to be a more environmentally friendly approach than using 100% refined crude products. In Indonesia, however, the B35 mandate has been implemented primarily to protect the nation’s economy from oil prices which are expected to remain high throughout 2023.

According to Reuters, “the B35 mandate will take up 11.44 million tonnes in palm oil this year, up from 9.6 million in 2022 under the country's B30 measure.” As a result, Indonesia has also announced tighter restrictions on palm oil exports in order to guarantee sufficient supply for the increased biofuel production. While the policy could be seen as short-term protectionism against volatile commodity markets, it aligns with the broader approach taken by Indonesian authorities towards developing domestic natural resources industries. In recent years, exports bans for iron ore and nickel have both been enacted to encourage investment into smelting and refining operations within the country. Nonetheless, at a time when India is importing record quantities of palm oil and demand from China is expected to rebound following the relaxation of Covid restrictions, the decrease in supply from Indonesia will provide upward pressure on edible oil prices.

Malaysia leads Palm Producer Pushback against EU

Another reason for upward pressure on edible oil prices is the response of the Council of Palm Oil Producing Countries (CPOPC) to the EU’s planned restrictions on the bloc’s palm oil imports. As part of a renewable energy directive, the EU has set an initiative to phase out palm-based biofuel blends by 2030 due to concerns about deforestation linked to palm oil production. As the two largest producing nations of the oil, Indonesia and Malaysia have expressed their irritation at the EU’s commitment and filed suits with the World Trade Organisation against the restrictions. Both countries have accused the EU of using environmental reasons to implement a policy which actually stems from trade protectionism.

The issue has escalated in the past weeks following comments from the Malaysian commodity minister that the country might ban exports to the EU in retaliation. While the formal response from CPOPC has not yet been decided, even the threat of Malaysia banning palm oil exports to the EU will threaten global edible oil supplies and could push prices upwards.

Drought in Argentina Threatens Soy Crop

While palm oil prices could be under pressure from geopolitical issues, soybean oil prices are facing an environmental challenge. The oil, second only to palm in terms of global consumption, is under threat of decreased supplies due to a major drought in the world’s largest exporter of the commodity; Argentina.

Rainfall across key growing regions in Argentina is at its lowest level for three decades, as noted by Karen Braun, resulting from a third consecutive La Nina spell which brings dry weather to South America. According to the Buenos Aires Grain Exchange’s data from the final week of 2022, only 10% of the crop was assessed to be in good or excellent condition, which stands in stark contrast to 57% one year earlier. A significant proportion of the country’s crop failing would pile more supply-side pressure onto the edible oil market, and it looks a real possibility at present.

Even if rainfall arrives and the crop recovers, there is further uncertainty as to whether Argentina's soybean oil would enter the global market. The Argentine Peso has experienced such high inflation over the past 5 years, which has accelerated since the pandemic, that in 2022 many Argentine farmers decided to withhold their crops from the market due to the depreciating value of selling crops which are internationally priced in US Dollars. This crisis led to the government implementing two rounds of a ‘soydollar’ scheme to provide a guaranteed price at which the farmers could sell. As a result of the success of the scheme, there may be an incentive for farmers to wait, hold onto their crop and speculate on the return of the soy dollar, which would further restrict supplies in the global edible oil market.

ChAI’s BMD Palm Oil price forecast 19/01/2023

ChAI’s Outlook

ChAI’s palm oil forecast is relatively neutral over the next 6 months, but with much more room for upwards price movements on a 12 month horizon. Up until the midpoint of the year, large amounts of BMD palm oil stocks are weighing on any upward movement. Following the massive price spikes witnessed in the palm market in 2022, which caused both producers to increase production and buyers to switch to alternatives, stocks rebuilt over H2. While levels declined during November and December, they still remain well above the previous two-year average over the past 2 years.

For soybean oil, ChAI is more consistently bullish over the next year, primarily driven by the long-term upward price trend which began in Q2 2020 and further supported by the bullish positioning of speculators on COMEX. To learn more about the data behind ChAI’s forecasts for palm and soybean oil, as well as over 40 other commodities, get in touch via the form below.

ChAI’s CME Soybean Oil Monthly Average price forecast 19/01/2023