A day after lifting the 3-week export ban on palm oil products, Indonesian government said it will reimpose a domestic market obligation policy requiring producers to sell a portion of its cooking oil output to the local market to ensure 10m mt of cooking oil remains in the local market while keeping domestic cooking oil prices under control. The latest policy will reduce Indonesia’s palm oil supply in the global market but more palatable than the entire shipments being banned. Nevertheless, the multiple changes to palm oil changes are expected to cause more volatility to the CPO prices. Maintain Neutral on plantation sector with a full CPO price forecast of RM5,000/mt.
- Imposing sales quota for domestic cooking oil. The world largest palm oil producing country is set to impose domestic market obligation (DMO) quota at 10m mt, including as much as 2m mt in reserves. The government is also planning to apply price control mechanism for domestic cooking oil. The trade ministry will determine the size of the DMO that must be met by each producer and the mechanism to produce and distribute cooking oil.
- Flip-flopping policy continues. The DMO policy existed before the export ban took place. In Jan, the government required exporters to set aside 20% of their shipment volume for the local market and then increased the percentage to 30% in the following month. The policy was scrapped just a week later as it failed to curb the cooking oil price hikes. Meanwhile, the Indonesian Palm Oil Association forecasts that Indonesian palm oil production stands at 53.8m mt this year and export is expected to reach 33m mt. Based on the proposed DMO quota of 10m mt, it means that nearly 20% of the CPO is required to be aside for the domestic food consumption.
- Strict execution required. To make it a fruitful policy, we think the authority should have a strict and fair mechanism that ensure all palm oil exporters contribute to the local supplies. The recent palm oil export ban lifted the monthly cooking oil stock to 109% of monthly demand from 33% in March and lower the average price of bulk cooking oil from 19,800 rupiah to 17,000 rupiah per litre. Ahead of the high production season, we think the latest policy may also be short-lived as domestic cooking oil stocks could expand in the near-term.
Source: PublicInvest Research - 23 May 2022