Indonesia's Palm Oil Agency Sees CPO Prices Rising
The Indonesian Palm Oil Association (Gapki) believes that the crude palm oil (CPO) price will stay between USD $750 and USD $790 per metric ton in October 2016. This prediction comes on the back of several positive sentiments. CPO demand from China, Europe, India and the USA has increased and is able to offset declining CPO demand from Africa and the Middle East. Fadhil Hasan, Executive Director at Gapki, informed that as a result of strong global CPO demand CPO reserves in Indonesia and Malaysia, the two biggest producers and exporters of the edible oil, are declining.
In August 2016 Indonesian stockpiles of crude palm oil (CPO) fell 11 percent month-on-month (m/m) to 1.70 million tons, particularly due to a large increase in CPO demand from the USA. The world's largest economy imported 135,150 tons of CPO from Indonesia in August, up 183 percent (m/m). Meanwhile, Indonesia's CPO export to China rose 69 percent (m/m) to 267,980 tons in August. Exports to Europe and India rose 43 percent (m/m) and 42 percent (m/m), respectively in August.
Indonesia's Reference Crude Palm Oil Price in 2016:
| Month | Price (in USD/ton) |
| January | 578.88 |
| February | 593.89 |
| March | 694.90 |
| April | 698.19 |
| May | 754.10 |
| June | 751.55 |
| July | 711.98 |
| August | 676.24 |
| September | 710.16 |
| October | 781.49 |
Source: Gapki
A research report from JP Morgan states that Malaysia will raise its export tax for CPO to 6.5 percent in October, from 5 percent previously. This move is also regarded to push CPO prices higher although the low soybean prices in the USA somewhat limit the price gain. Soybean oil and palm oil are considered “substitute goods” as food processors switch between both oils in search of the most favorable price.
Indonesian Crude Palm Oil Exports in August 2016:
| Export Market | August 2016 (in metric tons) |
Month/Month Growth |
| India | 497,300 | +42% |
| Europe | 486,050 | +43% |
| China | 267,980 | +69% |
| USA | 135,150 | +183% |
Source: Gapki
Meanwhile, JP Morgan expects global CPO production to decline by one million tons in 2016. In 2015 global CPO production reached 62,370 million tons. This year JP Morgan predicts that worldwide CPO production will reach 61,315 million tons. This decline is primarily caused by weather conditions. In late-2015 and in the first half of 2016 the El Nino weather phenomenon brought drier-than-usual weather conditions to Southeast Asia, followed by the looming La Nina phenomenon that brings wetter-than-usual weather in the region in the last quarter of the year. Both weather phenomenons have a negative impact on palm oil production. This year's declining CPO production is in stark contrast to the general trend. In preceding years, CPO production would always rise by between 2 and 3 million tons each year.
JP Morgan sees global CPO consumption rising to 63,373 million tons in 2016, up 4.1 percent (y/y). This growth is particularly fueled by growing CPO consumption in India and Indonesia. India's surprise move to cut the CPO import tax is likely to boost local demand (and support CPO prices) ahead of its peak output season. In Indonesia CPO consumption increases on the back of the B20 biodiesel program. Earlier in 2016, the Indonesian government launched the program that stipulates a mandatory 20 percent of fatty acid methyl ester (derived from palm oil) to be blended with 80 percent of diesel. This program was introduced to relieve pressures on Indonesia's trade balance and government budget deficit as it should lead to a decline in crude oil and fuel imports. Moreover, Indonesia is the world's largest producer of CPO and therefore supplies are guaranteed.
Indonesian Palm Oil Production and Export Statistics:
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |
| Production (million tons) |
19.2 | 19.4 | 21.8 | 23.5 | 26.5 | 30.0 | 31.5 | 32.5 | 30.0¹ |
| Export (million tons) |
15.1 | 17.1 | 17.1 | 17.6 | 18.2 | 22.4 | 21.7 | 26.4 | 24.0¹ |
| Export (in USD billion) |
15.6 | 10.0 | 16.4 | 20.2 | 21.6 | 20.6 | 21.1 | 18.6 | 16.0¹ |
¹ indicates forecast
Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture