— This is the script of CNBC's news report for China's CCTV on June 15, 2021, Tuesday.
Being the world's two largest palm oil producers, Indonesia and Malaysia together account for 85% of global production and supply. According to Rabobank, over 70% of palm oil workers in Malaysia are from overseas. And Reuters reports that migrant workers make up 84% of the palm oil workforce in Indonesia. The labor shortage in the palm oil industry has been an issue for these two countries in recent years. The restrictive measures during the pandemic have made the situation even worse.
Production of palm oil in Indonesia and Malaysia was on a steep decline since the outbreak of Covid-19. It started to rebound early this year. However, the new wave of infections in both countries brought new challenges. According to the Malaysian Palm Oil Association, 20% to 30% of potential production was already lost due to labor shortage, and they expect this number to increase this year especially among small producers.
The production cut is having a significant impact on pricing. Data released by the Food and Agriculture Organization (FAO) in early June showed that global prices for vegetable oils had increased for 12 consecutive months, and prices of palm oil in May hit the peak since February 2011. On top of weak supply, rising import demand has also been driving palm oil prices.
Both Indonesia and Malaysia increased export levies, but India, the largest vegetable oil importer, managed to import over 700,000 tons of palm oil from Malaysia in April, almost doubling the amount of the same month of 2020. Yet after an increase of over 100% in the past year, the price of palm oil now is under the pressure of correction. A report from S&P Global Platts on Monday said that the August palm oil contract on the Bursa Malaysia plunged 10% the same day, which reflects some hopes of production recovery. The price of soy oil, an alternative to palm oil, has had some correction recently which can also help to explain.
Palm oil is not only a major edible oil but also an important industrial material that can be used to produce various commercial goods, ranging from chocolates to cosmetics. Price appreciation of palm oil may pass inflation pressure onto downstream industries.