Indonesia has poured oil on the fire.

In the midst of soaring food prices, the government has banned the export of palm oil - of which it is the world's largest producer and exporter - from Thursday 28 April.

"I hope everyone will understand the need to take this urgent measure to protect all Indonesians," said Muhammad Lutfi, Indonesian Minister of Commerce.

Emergency because of the war in Ukraine.

This temporary halt in exports is, indeed, a perfect illustration of the butterfly effect of a war involving two countries located thousands of kilometers away.

"This is the beginning of a domino effect which could have economic and political repercussions" well beyond the Indonesian borders, estimates the site The Diplomat, specializing in Asian news.

From Ukrainian sunflower oil to Indonesian palm oil

Palm oil is indeed present in more than 50% of the packaged products present in supermarkets, recalls the CNN channel.

And a shortage could ultimately deprive the consumer of a whole range of items, from their favorite spread to most shampoos.

Indonesian President Joko Widodo did not make this decision for fear of a shortage in the domestic market.

“The reasons are not agronomic, since locally production is much higher than consumption: 49 million tonnes produced annually, compared to 15 million tonnes consumed by Indonesians”, explains Alain Rival, researcher in Jakarta for the Center for International Cooperation in agricultural research for development (CIRAD).

To understand this choice, it is rather necessary to turn to… sunflower oil.

Russia and Ukraine are the main exporters and, between them, supply nearly 80% of world demand.

But the war passed by there and “the fall in exports had a substitution effect in favor of palm oil, which resulted in a sharp increase in demand and prices on the international market”, details Alain Rival.

Palm oil thus costs 75% more than a year ago at the same period, notes Gro Intelligence, an American economic intelligence firm in a note on this stoppage of Indonesian exports.

This increase also occurs in a more general context of rising vegetable oil prices, which had a difficult start to the year.

“There have been staffing problems in Malaysia [second largest palm oil producer, Ed], droughts in Argentina [leading soybean oil exporter, Ed] and Canada [leading rapeseed oil exporter , Editor's note]”, indicates the Guardian. 

An increasingly unacceptable price pressure for Joko Widodo.

Palm oil is not only the basic ingredient for cooking in the most modest homes.

“It is also increasingly used in the Indonesian energy mix, particularly as a biofuel, and a large part of the growth in internal palm oil consumption comes from there”, explains Victor Baron, independent researcher in agronomy.

Take action before Eid al-Fitr

Since January, Jakarta has stepped up attempts to curb rising prices.

Indonesia had put in place palm oil export restrictions in January, then introduced aid for the poorest households to protect their purchasing power. 

And now, the total ban on exports.

If the government has resolved to do so, it is also because the Eid al-Fitr holiday - which marks the breaking of the fast in the month of Ramadan - takes place on May 2 and 3 in Indonesia and that "the authorities wanted ensure that there would be enough palm oil at an affordable price in the country with the most Muslims in the world,” says CNN.

While Joko Widodo hopes to buy social peace with this measure, the world is preparing to suffer the consequences.

There is, in fact, no real alternative to Indonesia, which alone accounts for 56% of all palm oil exports.

Malaysia - with just over 33% of total exports - lags far behind. 

And Kuala Lumpur can hardly increase its production.

First because of Covid-19, which pushed the country to fire a large number of palm grove workers.

But apart from the lack of manpower, “there is no longer any additional land available in Southeast Asia either,” underlines Alain Rival, from CIRAD.

Which, moreover, is good environmental news since “we should not therefore expect a resumption of deforestation”, adds this expert.

“Africa is a net loser from the Indonesian decision”

“All countries will suffer,” warns Rasheed Jan Mohd, director of the Pakistan Edible Oil Refiners Association, when interviewed by the Guardian.

The Indonesian decision will “further strengthen inflation starting with food prices”, explains Trinh Nguyen, analyst for Natixis bank.

All products that contain palm oil will become rarer, and therefore more expensive, while the demand for substitute products (whether other vegetable oils or products that do not contain palm oil) risks to explode, which should also push prices up.

The effect should first be felt in India, China and Pakistan, the three largest importers of palm oil, recalls Trinh Nguyen.

But the impact is likely to be particularly painful on the African continent, underlines the Reuters agency.

It is, in fact, particularly dependent on this traditionally inexpensive oil.

“Africa is a 'net' loser from the Indonesian decision as the continent imports about 16 times more palm oil than it exports.

As there are more consumers than producers, the balance is frankly negative in the very short term”, specifies Tancrède Voituriez, CIRAD researcher based in Nigeria.

In addition, “the continent is globally less autonomous than other regions in finding alternatives to palm oil”, emphasizes Victor Baron.

There is no possible local substitution and everything must be imported, unlike South America, for example, which can always rely partly on its production of soybean oil.

Africa, however, is not a monolithic continent.

“Côte d'Ivoire, for example, produces 543,000 tonnes of palm oil per year and exports only 240,000 tonnes.

It should therefore be less affected than other African countries”, qualify Fabienne Morcillo and Sylvain Rafflegeau, CIRAD correspondents for the palm oil sector.

For the countries that have the most to lose, the only hope is that Indonesia will quickly lift this ban.

This is quite possible because Indonesia remains economically very dependent on its palm oil exports.

"They brought in $20 billion in 2020, and depriving yourself of this revenue for too long risks having a significant effect on the country's finances," says Trinh Nguyen.

And then, Jakarta “may quickly run out of space to store all the palm oil that will not be consumed locally”, indicates the note from the experts of Gro Intelligence.

“The country generally exports 2.3 million tonnes of palm oil per month and can only store 2 million”, specifies this economic intelligence firm.

He believes the government should lift the export ban no later than a month from now. 

Despite everything, even in a month, this indirect consequence of the war in Ukraine is likely to do a lot of damage, especially among the poorest populations for whom palm oil remained the least expensive means of cooking.

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