Plantation commodity: Palm oil price ignited by export performance
This article has been translated by PwC Indonesia as part of our Plantation News Highlights service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
Bisnis Indonesia - Komoditas perkebunan: Harga minyak sawit terpantik kinerja ekspor
18 July 2023
By: M. Taufikul Basari
Jakarta - The price of crude palm oil (CPO) increased amid Malaysia’s export surge report in July 2023. However, a new regulation in the largest palm oil-producing country, Indonesia, is making traders cautious.
Based on Bloomberg’s data, CPO contract price in the Malaysia Derivatives Exchange (MDEX) increased by 0.87% to 3,933 ringgit per tonne when trading closed on Monday (17/7). The increase slightly reduces loss in 2023 that currently reaches -2.44%.
However, during the trade yesterday, CPO price declined by 1% and increased by up to 1.2%. The decline occurred when traders were observing the price of the commodity that could substitute palm oil, soybean, that declined by 0.8% last Friday.
Soybean price in the Chicago Board of Trade (CBOT) that opened at an increase provided a positive sentiment for CPO. Soybean futures contracts in the United States of America increased by 1.19% at the start of the trading day to US$13.87 per bushel.
“Export in July was strong, and it was the basic [price driver] of palm oil,” Kaleesuwari Intercontinental Trading and Hedging Strategies Head Gnanasekar Thiagarajan said as quoted from Bloomberg yesterday.
According to Intertek Testing Services, the CPO export of Malaysia, the second largest producer in the world, surged by 19% from 1 to 15 July compared to last month. The increase was boosted by strong demand from India, Africa, China, and Europe. Another cargo surveyor, AmSpec Agri, reported that their exports increased by 17%.
The new regulation that will be implemented in August is meant to increase the dollar supply and reduce the pressure on the local currency.
“Indonesian exporters might face working capital issues if 30% of their revenue is blocked. They can charge the additional cost to buyers,” Thiagarajan said.
In Government Regulation No. 36/2023 on Foreign Exchange from Export Proceeds (DHE) from Natural Resources Business, Management, and/or Processing Activities, the government requires exporters to deposit their funds in the Indonesian financial system for at least 3 months.
However, not all DHE from natural resources must be deposited for at least 3 months. Only DHE with an export value of at least US$250,000 or equivalent in the Export Customs Declaration.
On the other hand, the Indonesian government recently set a CPO reference price for export duty and export levy from 16 to 31 July 2023 at US$791.02 per metric tonne.
The reference price increased by US$43.79 or 5.86% compared to the period between 1–15 July 2023 to US$747.23 per metric tonne.
The Trade Ministry’s Director General of Foreign Trade Budi Santoso said that, with the reference price increase, the government would implement an export duty of US$33 per metric tonne and an export levy of US$85 per metric tonne for CPO for the next two weeks.
The increase in CPO reference price is affected by several factors. One of them is the indication that export is improving compared to May 2023, especially from Malaysia. The increase in CPO export from Malaysia is not offset by the increase in CPO production there.
“The factor [that increased CPO reference price] is the increase in soybean oil price,” Budi said at a press conference on Sunday (16/7).
In the short term, the lower soybean production would possibly keep the commodity’s price high compared to CPO price. It is making CPO price more economic.
Previously, the US Department of Agriculture (USDA) lowered their forecast for soybean production from 2023 to 2024 to 4.3 billion bushels, which decreased by 210 million from the forecast in June.
Grain deal
Meanwhile, the prices of several agricultural commodities are soaring high at the end of Ukraine’s wheat export deal that has ended after almost a year. Russia’s step to terminate the deal increases the uncertainty of the global food supply.
Moscow has several times threatened to get out of the deal, but they agreed to extend the deal for two more months from May to 17 July. The closing of the route will impact main buyers, such as China, Spain, and Egypt.
“The deal has ended today,” a Kremlin spokesperson said as reported by the Russian news agency, Tass, on Monday (17/7).
This step threatens the important trade route from Ukraine, one of the largest wheat and vegetable oil exporters in the world, right when the next harvest commenced. It also occurred after Russia stated that, yesterday, Ukraine’s drone had damaged an important bridge in Crimea.
Russia has told Türkiye and the United Nations (UN), which have mediated the deal, that they will not extend the deal. Moscow said that they would return to the deal after their terms are fulfilled.
A UN spokesperson for the Black Sea Grain Initiative did not provide an immediate comment. Ukraine’s presidential office also did not provide an immediate comment.
Hence, the market responds with an increase in wheat price for delivery in September 2023 in the CBOT by 3.02% to US$6.81 per bushel at the start of the trading period, followed by an increase in oat price by 2.09% to US$4.28 per bushel.
The deal has ensured the export of almost 33 million tonnes of plants through the Black Sea since it was signed in July 2022. It lowered global food commodity prices from the sky-high level after Russia’s invasion.
However, this route has been obstructed several times in the last few months and was almost empty, which disturbed the global food commodity supply.
A higher risk is in the long term as divided and expensive export logistics can drive farmers in Ukraine to cut their harvest even though it has shrunk due to the war.
There has been no new ship approved to join the grain deal since the end of last month. Russia has blocked one of the three open ports. The ship inspection time also became increasingly longer with less than one ship inspected per day in the first half of this year.
The block will increase the reliance on alternative trade routes through the Danube River and Ukraine’s neighbouring countries in the European Union (EU) even though the routes are still expensive and several countries opposed the routes.
