Crude palm oil prices dive to six-month low as Indonesia revises export policy

Crude palm oil (CPO) futures on the Bursa Malaysia Derivatives Exchange (BMD) dived to a six-month low on Thursday, April 27, following Indonesia’s revision of its palm oil export policy, as existing bearish sentiment was further exacerbated amid expectations of increased export availability.

The benchmark CPO futures contract for July delivery on BMD dropped 3.3% to MYR3,455 per tonne ($775 per tonne), the lowest level since October 3.

DMO and export policy changes

Indonesia’s trade ministry announced changes to its domestic market obligation (DMO) policy for palm oil today, covering four key points – lowering the domestic cooking oil target from 450,000 tonnes to 300,000 tonnes a month; tightening its DMO export ratio from 1:6 to 1:4; raising the multiplier incentives for packaged cooking oil and the release of the earlier suspended export permits over the course of nine months.

The changes will take effect from May 1.

Under the DMO, palm oil producers are required to supply a portion of their products locally to obtain a permit for exporting internationally, with the current export ratio allowing sellers to export up to six times the volume sold locally.

The policy was first implemented last year as Indonesia struggled to manage high local cooking oil prices amid tight supply, with the measures culminating in a short-lived but disruptive export ban.

Earlier this year, the world’s largest palm oil producer had raised its DMO cooking oil target from 300,000 tonnes to 450,000 tonnes a month for the period of February-April, in anticipation of higher domestic demand in the lead-up to the Ramadan fasting month and Eid festive holiday and maintain healthy levels of local cooking oil.

Indonesia had also suspended two-thirds of the unused export permits then, with the intention to release them following the Eid holiday.

“The volume of unused export permits has been estimated at around 3.03 million tonnes,” said Director General of Foreign Trade Budi Santoso.

“This will be released over the course of the next nine months until January 2024, averaging at 336,000 tonnes a month,” he added.

Furthermore, while the export ratio has been reduced under the new changes, the government has also raised the multiplier incentives as a measure to encourage sellers to sell packaged cooking oil under the government’s Minyakita program, as opposed to bulk cooking oil.

“Although the ratio has decreased from 1:6 to 1:4, the incentive multiplier for packaged cooking oil was increased from 1.5 to 2 for pillow packages and from 1.75 to 2.25 for non-pillow packages,” said Director General of Domestic Trade Isy Karim.

The changes are designed to allow for more exports from May onwards, which has added to existing bearish sentiment in the wider vegetable oil complex.
“This tightened ratio is not likely to affect supply much as there is still room for more exports due to the release of the suspended export permits,” a regional trader said.

“Overall sentiment is still bearish with rival vegetable oils being priced more attractively as compared to palm oil, with Indian and Chinese buyers preferring soy and sunflower oil instead.”

On top of that, Budi Santoso added that Indonesia still has around 6.9 million tonnes of unrealized export permits, excluding the earlier suspended permits.

These are understood to have been accumulated during February-April, highlighting the surplus of available permits.

“The average export per month is currently 1.86 million tonnes in the January-March 2023 period; I don’t think this will disrupt our export performance,” said Budi.

Bearishness in the vegetable oil complex

The changes come with palm oil prices already under pressure from existing weakness in the wider vegetable oil complex, with high supplies of competing soft oils and healthy stock levels at destination markets keeping demand at bay.

The spread between palm and its rivals has narrowed of late, with palm oil seen trading higher than rivals sunflower and rapeseed oil – a rare occurrence.

CPO offers to India in the second half of the day following the announcement were seen at least $20 per tonne lower at $940 per tonne CNF for June and $900 per tonne CNF for July.

Olein offers to China were at $945 per tonne CNF for the second half of May, while offers for June and July shipments were around $920 per tonne CNF and $880 per tonne CNF, respectively, though trade was quiet with import disparities remaining.