La Niña and labor shortages hamper production in 2020
Malaysia is currently the world's second-largest exporter of palm oil. The country’s inventory, however, was reduced by the end of November 2020 to below 1.5 million tonnes, the lowest since June 2017. Following the outbreak of COVID-19, the Malaysian government placed movement restrictions as a means to halt the spread of the virus. These restrictions limited the movement of seasonal migrant workers to palm oil plantations, causing labor shortages that negatively impacted palm oil yields.
Source: Treehugger
2020 also witnessed the emergence of La Niña towards the end of the year, which led to severe rainfall and flooding across Southeast Asia, including Malaysia and Indonesia. These La Niña-induced heavy rains disrupted production in both countries and was another factor that led to limited palm oil supply in 2020.
Palm oil prices expected to be volatile for 2021
Indonesia’s palm oil production has not been as severely affected as that of Malaysia, as production levels began to recover in July 2020, the usual peak period of the palm oil season. The high pace of acceleration is expected to continue this year, with estimates projecting that production in Indonesia will increase by 1.8% in 2021 and reach 48.3 million tonnes, compared to last year. The recovery in production has been attributed to favorable weather conditions and improved fertilization techniques.
Palm oil production in Malaysia for 2021 is also forecast to improve, with estimates showing 19.6 million tonnes, a 2.4% increase compared to last year. A supply crunch in edible oils globally led to Malaysian palm oil prices fetching a nine-year high at the beginning of the year, at MYR 3,800 (USD 940.13) per tonne. Despite this rise, prices are forecast to average at MYR 2,800 (USD 694.96) a tonne in 2021, compared to MYR 2,685 last year.
According to analysts and industry players, price volatility is expected to continue in 2021. There is anticipated to be improved palm oil supply for this year. COVID-19 cases, however, continue to rise globally due to the detection of new variants leading to the reinstatement of lockdowns which may lead to a reduction in demand from hotels and restaurants. Such a scenario, consisting of increased production and slow demand may lead to stockpiling, which would cause prices to fall.
On the other hand, Indonesia has also launched a B30 mandate, stipulating that biodiesel should contain 30% fatty acid methyl ester (FAME) made out of palm oil. This is the highest mandatory mix in the world and is set to boost palm oil consumption locally. This may cause palm oil prices to push up as demand for edible oil is set to be bolstered by the B30 mandate, with the country also aiming to instate a B40 mandate by the end of 2022, that would require a 40% palm oil mix and increase palm oil demand further. As a result of these factors, palm oil prices are set to remain unstable throughout the year.
Sources
Reuters. “Palm prices may hit nine-year high in turbulent 2021.”
Bloomberg. “La Nina Rain to Lift Palm Oil Output in Top Grower to Record.”
Fitch Ratings. “La Nina Likely to Support Yields, Lower Palm Oil Prices in 2021.”
Agricensus. “La Nina, labour shortage to limit 2021 palm oil output rebound.”
Agricensus. “Malaysia sets crude palm oil export tax at 8% for January.”
Agricensus. “Indonesia palm oil stocks hit highest on record: Gapki.”
Reuters. “Indonesia launches B30 biodiesel to cut costs, boost palm oil.”
Successful Farming. “INDONESIA PALM ASSOCIATION SAYS B40 BIODIESEL MANDATE MAY BE DELAYED BEYOND 2022.”
Forests News. “Governing sustainable palm oil in Indonesia: An evolving policy regime.”
Treehugger. “What You Need to Know About Palm Oil.”