Lingering drought damage to push Indonesian palm exports to 3-year low

04.08.2016

High export levies, ongoing heat damage, and heavy domestic demand will drive Indonesian palm oil exports to three-year lows next season, US officials said.

The US Department of Agriculture's bureau in Jakarta forecast exports from the world's top palm grower at just 24.75m tonnes for 2016-17.

This is 1.75m tonnes below the USDA's official forecast, and would be the lowest level since 2013-14.

Indonesian palm oil production will recover more slowly than expected next season, after extensive heat and drought damage during the 2015-16 El Nino, the bureau said.

And domestic demand for palm oil is booming to record highs, thanks to increased local biofuel use, squeezing exports still further.

Drought damage

The bureau saw Indonesian palm production under ongoing pressure, following last year's severe El Nino, which triggered drought across Indonesia, including key palm oil production areas in southern Sumatera and southern Kalimantan.

The severity of the heat damage prompted the bureau to cut its production estimates to 32.0m tonnes in 2015-16, 1.0m tonnes below the official USDA forecast.

True the bureau suggested that the worst of the heat damage may be now be over, as field observations made in June "verified that production declines are peaking.

"Peak yield declines correspond with a lag of approximately six to nine months following dry weather," the bureau said.

But the bureau said that "Given the severity of stress to some of the plantations… full recovery is expected to take up to 24 months under normal rain conditions".

Palm oil production for 2016-17 was therefore seen at just 33.5m tonnes, 1.5m tonnes below the official USDA estimate.

Higher domestic consumption

And ideas of Indonesian palm oil consumption were also raised, thanks to higher biofuel usage, adding to the tightness in supplies.

"Indonesian palm oil consumption has been transformed through biodiesel blending and a subsidy program implemented in mid-2015," the bureau said.

Indonesian biofuel demand, which was negligible at the start of last year, has been driven by a levy scheme, which uses export tarrifs for palm oil to fund domestic biofuel use.

The Jakarta bureau reports that more than 700m litres of palm-derived biodiesel were subsidised through the scheme in the first three months of 2016.

The increase in biodiesel demand was seen driving Indonesian palm oil consumption to an all-time high of 9.62m tonnes in 2016-17, 620,000 tonnes above the official USDA estimate.

Tariff barrier

The bureau also noted weaker demand, due to competition from other vegetable oils, and Indonesia's $50 a tonne levy on palm oil exports.

The bureau noted that "export declines to major export destinations have been led by China, the EU, and the African continent".

"Palm oil exports to China have declined by 12% over the previous year, primarily because of softening demand in China due to increased soybean crushing for China's growing livestock sector.

October crude palm oil futures in Malaysia finished up 3.3%, at a six-week high of $2,417 a tonne.


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