Palm oil futures skyrocket after Indonesia raises domestic obligations

Indonesia has increased the quota of palm oil that suppliers need to set aside for domestic use to 30% of their total exports from an earlier mandate of 20%, the country's trade ministry announced March 9.

The ruling comes as Indonesia, the world's top producer and exporter of palm oil, tries to delink domestic cooking oil prices that have climbed about 40% in a year due to an extended rally in international vegetable oil markets.

Traders said Jakarta's ruling came as a surprise as many were expecting a reduction in quotas, but the opposite has happened.

"All are suffering, sellers cannot export cargo without hurdles, stock levels are rising and so are prices," said one trader. The rule is forcing sellers to sell at low prices, not being able to export easily, and credit has become a nightmare, sources told S&P Global Commodity Insights.

Many trade sources also said increasing export taxes on palm oil would be a better way to subsidize the domestic cooking oil program as the DMO rule is causing widespread confusion among both buyers and sellers.

Following the announcement, palm oil futures on Malaysia's commodity exchange, which underpin international palm oil prices, hit limit up and trading was stopped for 10 minutes at 3:49 pm local time, Bursa Malaysia Derivatives said.

DMO rules were formally announced for Indonesian palm oil producers first on Jan. 27.

Under the policy, producers who did not declare their export plans were denied export licenses, with the initial confusion leading to stalled shipments at ports in February, according to trade sources.

Indonesia's export curbs

Emphasizing that the public must have cooking oil at an affordable price, trade minister Muhammad Lutfi said that as of March 8, 415,787 mt of cooking oil from the DMO program was distributed to the market.

Between February 14 and March 8, export licenses for 2.77 million mt of palm oil products were issued by the ministry, Lutfi said.

Jakarta's DMO policy on palm oil was originally looking to supply about about 1.5 billion liters of subsidized cooking oil, or roughly 1.36 million mt, in six months.

The March 9 ruling will also extend the DMO on palm oil beyond its earlier deadline of end-June.

Producers have supplied the market about 350 million liters of cooking oil in the last three weeks but cooking oil is still scarce due to panic buying by households, hoarding, and absence of some "regular players," said Togar Sitanggang, deputy chairman of Indonesian Palm Oil Association, in a conference March 9.

Consumers are buying more instead of their regular amounts due to the uncertainty in Indonesia leading to an overall shortage, a trade source told S&P Global.

Prices skyrocket

Indonesia's decision along with a combination of tight stocks at destinations and tightening supply at origins lead to the May palm olein contract on China's Dalian Commodity Exchange to close limit up and 942 points higher. This was followed by BMD, which jumped 10% to limit up during afternoon trading, Marcello Cultrera, sales manager and derivatives dealer at Kuala Lumpur-based Phillip Futures said.

May crude palm oil futures on Malaysia's BMD exchange, rose to MR7,057/mt ($1,685.46/mt) on March. 9. The May contract has gained close to 29% since Feb. 15 when it became the third-month contract on the BMD.

International vegetable oil prices raced past fresh all-time highs since Russia's invasion of Ukraine, as the war effectively stopped sunflower oil supplies from the two countries that account for about 76% of the world's sunflower oil exports.

Crude palm oil FOB Indonesia was priced at $1,930/mt on March 9, according to S&P Global data, up 22% since the war began. Meanwhile, soybean oil Brazil FOB Paranagua rose 16% to $1,826.53/mt on March 8.