Edible Oil Prices: Effects of Ukraine-Russia War and the Novel Indonesian Export Policy

By Abdulghani Al-Wojih 

Global inflation has caused a surge in the price of basic commodities. As countries strive to protect their populace, Indonesia, the world’s largest palm oil producer, enforced a 20% retention of all planned oil exports to be sold domestically. This resulted in the world market plugging the supply deficit with Sunflower and Soybean oils, both of which were facing unique challenges. Soybean oil supplies were greatly affected by the two-year drought in Argentina and Brazil due to La Nina. On the other hand, Sunflower oil supplies have come to a sharp slump following the Russia-Ukraine crisis that shut down trade in the Black Sea – it accounts for 76% of global sunflower oil exports.

This disruption of alternative oil supplies has forced the world to refocus solely on palm oil of which Indonesia and Malaysia combined produce more than 90% of global supplies. But Malaysia posted weak production over the last six months, with December 2021 being one of the biggest month-on-month tumble in a year, due to the heavy precipitation and flooding as well as labour shortages, leaving the world dependent almost exclusively on Indonesian palm oil and related finished goods.

Trends in Crude Palm Oil prices

Before COVID took a toll (around April 2020), Crude Palm Oil (CPO) prices were around USD700/MT. Whereas the cost of CPO shot up to approximately USD1490/MT due to the compounding effects of the pandemic, it recorded the highest jump within the first week of March, from USD1760/MT to USD1980/MT, following the Ukraine-Russia war.

Locally, even though COVID related factors had already caused a jump in the price of a 20L Jerrycan from KSH2,200 to KSH4,500 in under 2 years, after the invasion, the price shot up to KSH 5,100/= in under a week. Currently the prices of 20L oil across brands is averaging Ksh 6000. This rise is set have an upward ripple effect in the prices of basic commodities and food businesses. For instance, the cost of bread of which oil is a major ingredient as well as the cost of food in eateries and other ready-to-eat prepackaged foods.

Kenyan families have had to adjust and adopt. This can be proven by the current significant rise in demand for solid fat since it is cheaper than liquid oils. Retailers who measure liquid oil have also become empathetic. They are now selling smaller portions such as 100ml and 150ml compared to the preferred 250ml by retailers. In the house, review of cooking methods and food choices are the new decisions that have to be made to reduce oil consumption and keep it within the house budget.

Effects of surging fuel prices on edible oils

Russia is the world’s second top producer of crude oil after Saudi Arabia. The ongoing Russia – Ukraine crisis has led to a global standoff on oil and gas that has affected energy supplies.  As the US implemented a ban on Russian oil, and begun to mop up supplies from other countries, the crude oil prices jumped to a 14-year high. This has already been felt at the local pump with the prices of petrol and diesel both going up by Ksh 5.

This is expected to affect the edible oil supply chain immediately with the expectation that the prices will soar sharply above the current Ksh 6000 per 20L jerrycan due to transport of CPO from Mombasa Termini to the refineries and also, of finished goods from refineries to the retailers. This is besides the expected rise in the cost of electricity which will further push up the cost of Production.

Interventions

To cushion Kenyans from the full brunt of the price hike, sector players have agreed and taken a raft of urgent measures, including selling-at-cost. There is still much that can be done especially from the government, for instance, by scrapping the 3% RDL and IDF, review the cost of fuel and electricity, amongst other possible interventions.