Trade Policy Half a World Away Affects Soybean Prices in Iowa

Palm Oil is the world’s most consumed cooking oil. In 2022, it is expected to account for 40% of all vegetable oil produced worldwide. Soybean oil is the second most popular vegetable oil consumed for cooking, representing 29% of all vegetable oil worldwide. Production of both palm oil and soybean oil are increasing.  

Figure 1. World Vegetable Oil Production 

Palm oil is grown in 44 countries, but the global market is dominated by only two: Indonesia and Malaysia. In 2019, the world produced 74.7 million metric tons of palm oil. Indonesia accounted for 57% of this (43 million metric tons), and Malaysia produced 27% (20 million metric tons). 84% of global palm oil production comes from Indonesia and Malaysia. 

Figure 2. Palm Oil Producing Countries 

The price of soybean oil is highly correlated to the price of palm oil, and since palm oil is the vegetable oil that is produced the most and the most used in cooking, it tends to have a major influence on the price of all other vegetable oils and often is the price leader among the vegetable oils. And the effects of palm oil trade policy are felt across the globe. Recently, palm oil supplies in Indonesia are surging contributing to the recent 45% collapse in palm oil prices. Inventories of palm oil in Indonesia have swollen to 10 million metric tons and are projected to increase in July and August, according to Dorab Mistry, a veteran palm oil analyst at Godrej International Ltd. Mr. Mistry was quoted as saying, “They (Indonesia) are chock-a-block with palm oil. Barges, ships, everything is being used to store palm oil. Whatever is being done by the government is too little, too late.”  

In response to increasing food prices, an particularly vegetable oil prices, caused by disruptions to flows of sunflower oil and other vegetable oils from Ukraine, the Indonesian government imposed an export ban on palm oil in April 2022, only to lift it a month later. But that one-month ban on palm oil exports from the largest supplier of palm oil created havoc in world vegetable oil markets. As can be seen in Figure 3, when the export ban was imposed on palm oil, prices rose from  when the export ban was imposed, rising from $6,363 Ringgit per metric ton to $7,757 Ringgit per metric ton by the end of April, a 22% increase in one month.  Palm oil buyers from around the world were scrambling to find supplies from somewhere other than the world’s largest supplier.  In response to the rise in palm oil prices, and the decline in available vegetable oils on the world marketplace, soybean oil skyrocketed from 70 cents/lb to 91 cents/lb., a 30% increase in the same time period. 

According to APKASINDO, an association of Indonesian oil palm farmers, 25%?of palm oil mills stopped purchasing the palm fruit from farmers during the ban, affecting the income of the farmers. Yet, palm oil stocks began to rise in Indonesia due to the ban on exports. So, the world market turned to soybean oil.  

Figure 3. Palm Oil Prices Overlaid on Soybean Oil Prices (back series is Soybean Oil, front series is Palm Oil 

In Indonesia, when there is a ban of palm oil exports, the first reaction of the palm oil industry, especially the corporations, seems to be to push the price of raw materials from the farmers down. This led to demonstrations by farmers in Indonesia and resulted in the government lifting the export ban. But damage had been done to the market for palm oil as stocks surged, and demand patterns shifted. But then when there was a reversal in their trade policy, releasing the burgeoning supplies of palm oil on the world markets, prices tumbled, dropping 53% to $3,632 Ringgit by early July.  Soybean oil prices peaked one day after palm oil prices peaked.  And following palm oil down, soybean oil dropped from 91 cents/lb to 60 cents/lb, a 34% decline.  

The ban was nothing new for Indonesia, said Françoise Nicolas, director of the Center for Asian Studies at the Paris-based French Institute of International Relations. It simply came “at a bad moment” when oils elsewhere were being affected by other factors, she said. 

What is surprising, she said, is that the ban was lifted before the price had dropped. Instead, the government announced the implementation of a domestic market obligation that would require producers to sell a percentage of their product locally at a set price, while the Indonesian Bureau of Logistics, the country’s food procurement agency, will create a cooking oil stockpile. 

The policy amendments have reportedly?slowed down access to palm oil export permits, leaving Indonesian stores still full of palm fruits, and farmers unable to sell their product. In a bid to get things moving again, the government has lowered the maximum export tax and levy from $575 to $488 per metric ton?and launched an initiative to see 1 million metric tons of palm oil products?shipped by the end of July. 

Figure 4 and Figure 5 show the relationship between soybean oil and palm oil. Soybean oil typically trades at a premium to palm oil and a $1/ton move in palm oil prices results in a $1.09 per ton move in soybean oil prices. The R-Square of soybean oil to palm oil is .92 suggesting that variations in the price of palm oil explain 92% of the variation in soybean oil prices. 

Figure 4. Soybean Oil and Palm Oil Prices, 2013 - 2022 

Figure 5. Correlation of Soybean Oil Prices to Palm Oil Prices 

Here in Iowa, while the export ban on palm oil helped push prices higher during April, that policy contributes to challenges in operating biodiesel plants and disrupts supply chains of Iowa’s soybean processing plants. As is typical disruptions to export flows and demand patterns, it is often producers who bear the brunt of the policy fallout.  Soybean oil is now 15% lower than it was before Indonesia imposed their export ban. In turn, soybean prices in Iowa are now 7% lower than they were when this trade disruption began. 

 Ian Mitchell, a senior policy fellow and co-director of development cooperation in Europe for the Center for Global Development believes that ongoing restrictions will play a role in worsening food insecurity currently being experienced worldwide by putting pre3ssure not only on palm oil prices but also on substitute products like soybean oil, and in turn, on soybeans, as well as alternatives such as grains.  

Stability in domestic food and energy policy matters but so does stability in international trade policy. Rapid swings in policy positions and ad hoc actions such as export bans tend to disrupt supply chains and exacerbate problems with food supplies and distribution. And at the same time, these swings in trade policy often result in farmers holding the bag as companies widen margins and sometimes withdraw bids from local markets in response to the uncertainty brought about by erratic trade policy, even if it is in Indonesia. 

Economic analysis provided by David Miller, Consulting Chief Economist, Decision Innovation Solutions on behalf of Iowa Farm Bureau.