Malaysian Palm Oil Futures up to August 2008. Indonesian Palm Oil futures have followed suit and have continued the decline into 2009

Last week the Indonesian government announced the creation of new palm oil plantations on peat lands, causing dismay in the environmental sector. As reported in my blog last week, suggested reasons fall into two camps: firstly it gives the palm oil plantation owners something in an election year and secondly the global recession, thereby providing employment and much needed currency.

Indeed this recession has led to a collapse in commodity prices in general, and palm oil prices in particular, hitting Indonesia hard. While increasing production could partially offset this fall, it would eventually lead to a glut in palm oil and a complete collapse in palm oil futures, similar to coffee in the 1990s. However Indonesia has moved to control the price of palm oil raising the spectre of a palm oil equivalent of OPEC – or OPOEC (Organisation of Palm Oil Exporting countries).

Indonesia, together with Malaysia, controls 85 per cent of the world’s crude palm oil (CPO) output and 40 per cent of the natural rubber production so any agreement to protect the price of palm oil will have global repercussions. However there is another factor in Indonesia and Malaysia agreeing to co-operate with each other: the demand by many importing countries (mostly Europe and the United States) to have Crude Palm Oil (CPO) imports subscribe to the Roundtable on Sustainable Palm Oil (RSPO) standard. At present only one Indonesian plantation meets these standards so in future a potentially paradoxical situation could occur: the price of palm oil will skyrocket because of the non-tariff environmental restrictions on palm oil, yet Indonesia will not benefit because of the lack of accredited plantations.

Therefore Indonesia and Malaysia have agreed a number of measures primarily aimed at boosting domestic demand. These include:

<!–[if !supportLists]–>· <!–[endif]–>Replacing and replanting palm oil plants more than 25 years old thereby reducing supply;

<!–[if !supportLists]–>· <!–[endif]–>Mutual investment in each other’s countries;

<!–[if !supportLists]–>· <!–[endif]–>Joint lobbying of importing countries;

<!–[if !supportLists]–>· <!–[endif]–>Carrying out a bio-fuel program and increasing the amount of CPO in fossil fuels for both public transportation and industrial consumption from 1 per cent and 2.5 per cent to 2.5 and 5 per cent respectively.

Given, for example, Europe’s requirement for at least 10% of the fuel used in transport will be biofuels by 2020, it will be interesting to see what happens first: a ‘rush’ by Indonesian palm oil plantations to get accreditation or a relaxation of environmental standards in the importing countries. By trying to boost domestic consumption however, Indonesia is creating an ‘artificial’, captive market for its products meaning more land will be converted to palm oil production in the future.

 

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