The end of cheap palm oil? Output stalls as biodiesel demand surges

The End of Cheap Palm Oil

Cooking oil prices are set to rise for years to come, driven by stagnating production levels and Indonesia’s aggressive push for biodiesel, which is making traditionally affordable palm oil more expensive. For decades, palm oil has been the cheapest vegetable oil globally, thanks to booming production and intense competition for market share. However, this era of affordability is coming to an end. As the world’s largest producer of palm oil, Indonesia has increased the mandatory palm oil content in biodiesel to 40%, and it is considering raising this to 50% by 2026. Additionally, the country plans to introduce a 3% palm oil blend for jet fuel starting next year. These moves aim to reduce fuel imports but are already impacting global palm oil supplies.

Industry analyst Dorab Mistry, director of Godrej International, notes that the days of palm oil trading at $400-per-ton discounts are over. "Palm oil won’t be that cheap again as long as Indonesia prioritizes biodiesel," he said. As a result, Indonesia’s palm oil exports are expected to drop to 20 million metric tons by 2030, down from 29.5 million in 2024. This reduction, coupled with lower production in neighboring Malaysia due to floods, has already pushed palm oil prices above those of rival soyoil, prompting buyers to reduce their purchases.

Stunted Growth in Production

The growth of palm oil production, dominated by Indonesia and Malaysia, has slowed significantly. From 1980 to 2020, production nearly doubled every decade, with average annual growth of over 7%, matching global demand. However, this rapid expansion has stalled. In Malaysia, production stagnated over a decade ago due to limited land for new plantations and slow replanting efforts. In Indonesia, concerns over deforestation have also slowed growth, and smallholder farmers, who account for 40% of production, have been reluctant to replant.

As a result, global production growth has slowed to just 1% annually over the past four years. Thomas Mielke, executive director of Oil World, forecasts that production growth in the current decade will average 1.3 million tons per year, less than half the average of 2.9 million tons in the previous decade. Production is likely to lose further momentum due to labor shortages, aging plantations, and the spread of the Ganoderma fungus, which is reducing yields.

The Reluctance to Replant

One of the main challenges facing palm oil production is the reluctance of farmers to replant their trees. Oil palms typically start losing productivity after 20 years and need to be replaced after 25 years. However, new trees take three to four years to yield fruit, leaving land unproductive during this period. This has discouraged many farmers from replanting, especially in Malaysia. In 2024, Malaysia replanted just 114,000 hectares, or 2% of its total planted area, far below the target of 4% to 5%.

In Indonesia, slow replanting has led to lower yields as plantations age. The country’s crude palm oil yields fell by 11.4% to 3.42 tons per hectare over the past decade. While newer palm oil-producing countries such as Colombia, Ecuador, Ivory Coast, and Nigeria have increased their output, industry officials say their growth cannot keep up with rising demand, particularly for biofuels. Analysts Mistry and Mielke have called on Indonesia to resume issuing new permits for palm oil plantations, a practice halted in 2018. Without new plantations, Mistry warns of periodic shortages and high prices, which would impact 3 to 4 billion consumers in the developing world.

Knock-On Effects Across the Globe

Higher palm oil prices are already causing ripple effects in global markets. In India, the largest buyer of vegetable oils, crude palm oil (CPO) has commanded a premium over crude soybean oil for six consecutive months, sometimes exceeding $100 per ton. Just a year ago, palm oil traded at discounts of over $400 per ton. Indian buyers paid $1,185 per ton for CPO last week, up from less than $500 in 2019. These price increases are complicating efforts by governments worldwide to control inflation, whether in palm oil-reliant nations or those dependent on rival oils like soybean, sunflower, and rapeseed.

The Future of Palm Oil Demand

Despite rising prices, palm oil consumption is expected to continue growing, driven by surging demand from the chemicals and biofuel sectors. Industry officials point to a looming demand-supply imbalance, particularly as alternative oils like soybean and sunflower cannot fully replace palm oil. "We see huge demand increases happening for palm oil, and with limited land, there will be a demand and supply imbalance," said Harish Harlani, vice president at P&G Chemicals.

However, higher palm oil prices are leading buyers to explore alternatives. For instance, Indian consumers are shifting to soybean and sunflower oil, causing their prices to rise as well. "As buyers switch to soy and sunflower, their prices shoot up too," said Sanjeev Asthana, CEO of Patanjali Foods Ltd. "Plus, there’s only so much of those oils available, so they can’t completely take palm oil’s place."

A Perfect Storm of Challenges

The palm oil industry faces a perfect storm of challenges, from stagnating production and biodiesel mandates to labor shortages and environmental concerns. While demand for palm oil remains strong, supply constraints are creating a volatile market. Unless Indonesia lifts its moratorium on new plantations or finds other ways to boost production, palm oil prices are likely to remain elevated for years to come. This will not only affect consumers but also have broader economic and environmental implications, as the world grapples with balancing energy security, food security, and sustainability.