No Recovery in Palm Oil Price: Demand Weakens while Production Grows
The recovery in global palm oil prices that seemed to have started last spring, has ended. A few months ago, optimism had colored expectations of many analysts as palm oil prices went up about 10 percent between early May and mid-June, after tumbling 30 percent in 2012 (causing that palm oil was one of the worst performing commodities in terms of price growth last year). However, the palm oil price increase earlier this year was merely the result of falling production rates in Indonesia and Malaysia, the world's largest palm oil producers.
Initially, it was expected that production rates would decline further in Indonesia and Malaysia as most palm trees are reaching an old age and thus become less productive. In 2012, aging trees had been offset by good weather conditions, resulting in good production numbers. This year, however, weather conditions have not been conducive for the palm oil sector in both countries. In fact, in May, Malaysia had produced its lowest crude palm oil output in the last five years. Therefore, declining output triggered a recovery in palm oil prices.
Moreover, production rates of palm oil in India have been higher than expected, causing less need for the country to import the commodity. China is also believed to have sufficient stockpiles after its imports rose 23 percent (year on year) in the last six months. As such, global palm oil demand is expected to decrease further in the months ahead.
For a country like Indonesia, it is bad news that the value of its palm oil export will most likely reduce in the near future. Indonesia is now entering the peak season in terms of palm oil production, thus placing more downward pressure on the price of palm oil. Indonesia's oil palm plantation and processing industry is a key industry to the country's economy: the export of palm oil is an important foreign exchange earner, while the industry provides employment opportunities for millions of Indonesians.
Global palm oil production is dominated by Indonesia and Malaysia. These two countries together account for around 85 to 90 percent of total global palm oil production. Indonesia is currently the largest producer and exporter of palm oil worldwide.
Indonesia's Palm Oil Production and Export:
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013¹ | |
| Production (million metric tonnes) |
16.8 | 19.2 | 19.4 | 21.8 | 23.5 | 26.5 | 28.0 |
| Export (million metric tonnes) |
n.a | 14.2 | 15.5 | 15.6 | 16.5 | 18.1 | 21.0 |
| Export (in US$ billion) |
n.a | 15.6 | 10.0 | 16.4 | 20.2 | 21.6 | n.a |
¹ indicates a forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture