The Indonesian palm oil price reached USD 749/MT on 16th October, up 6% over the prior two-weeks. Prices for most palm oil products have followed a bullish trend since May due to low supply. The latest figures show Indonesian palm oil production for July fell 6% month-on-month (m-o-m) and 8% year-on-year (y-o-y) to 3.8 million tonnes, mainly due to shortages of fertiliser.
In spite of this, the developing La Nina weather pattern is likely to boost palm oil fruit yields over the 2020/21 marketing year (MY). The last La Nina seen over 2017/18 was relatively weak, however this still led to higher palm oil output.
The Meteorological, Climatological and Geophysical Agency of Indonesia has forecast a low-to-moderate intensity La Nina for Q3 2020, with the forecast predicting higher average rainfall for 55% of the country. This will likely increase Indonesian palm yields and in turn production, which the United States Department of Agriculture projects will reach 43.5 million tonnes in 2020/21 MY, up 2% y-o-y.
In addition, the Indonesian government is planning another hike in export duties over the current $55/tonne flat rate, to try to support the B30 domestic biodiesel blending programme. According to Oilworld estimates, Indonesian biodiesel production will fall to 7.2 million tonnes in 2020, from 7.48 million tonnes in 2019. This will likely be bearish for palm oil prices, due to their use as the primary feedstock.
The palm oil export duty hike is part of a broader strategy of building up domestic consumption to offset lower export demand. Export markets such as the EU are trying to pivot away from palm oil towards waste feedstocks such as used cooking oil. The latest figures show Indonesian August palm oil exports were down 14% m-o-m to 2.68 million tonnes, and exports may decline further as we head into the winter lull.