Palm Oil Prices Explained

Export bans from key producing countries and the escalating tension in the Middle East drive palm oil prices to surge in global trading markets. 

Experts predict that the commodity’s price will rise by 10%-15% in 2025 as Thailand issues a crude palm oil export ban to reinforce its local fuel arsenal and reduce its reliance on fuel imports. On the other hand, Indonesia rules out another biofuel export quota due to lower output. 

While Malaysia didn’t issue any export regulations, the country’s production posted lower yields because of warming temperatures. This supported the commodity’s price rally in the global market. 

On the supply side, the rise of vegetable oil prices and the mounting tension between Israel and Iran further elevated palm oil prices.

Why are palm oil prices fluctuating?

1. Supply and Demand

Supply and demand significantly impact palm oil because they determine the quantity of palm oil available in the market and the level of desire for it. When supply exceeds demand, palm oil prices tend to decrease. Conversely, when demand surpasses supply, palm oil prices tend to rise.

2. Weather Condition

Weather plays a significant role in palm oil production. Unfavorable weather conditions such as droughts, floods, or storms can damage crops and reduce production, leading to a decrease in supply and higher palm oil prices.

3. Substitute Oil

The prices of alternative oils, like soybean oil, affect the prices of palm oil. If the price of substitute oil such as coconut oil rises, it can lead to a higher demand for palm oil. However, if the price of a substitute oil decreases, it may reduce the demand for palm oil.

4. Production Costs

The relationship between production costs and palm oil prices is a fundamental aspect of the agricultural commodities market.

When production costs rise, producers may seek to pass these increased costs on to consumers, resulting in higher prices for palm oil and its derivatives.

5. Biofuel Policies

Biofuel policies play a vital role in shaping the demand for palm oil as a feedstock for biofuel production, which in turn affects palm oil prices.

Policies that encourage or discourage the use of palm oil in biofuels can have a remarkable touch on the overall demand and market dynamics of palm oil. Additionally, changes in biofuel mandates or subsidies can lead to fluctuations in palm oil prices.

6. Currency Exchange

Currency exchange rates play an important role in determining the competitiveness and demand for palm oil in the global market. Fluctuations in exchange rates can influence production costs, export competitiveness, and demand. Thus, creating a shift in international palm oil prices.

Which variables impact the price of palm oil?

• Supply and Demand
• Weather Condition
• Substitute Oil
• Production Costs
• Biofuel Policies
• Currency Exchange
• Government Policies and Regulations
• Stock Level and Inventory

Where does palm oil come from?

It’s an edible vegetable oil that comes from the fruit of oil palm trees, the scientific name is Elaeis guineensis. Two types of oil come from this tree.

Crude palm oil comes from squeezing the fleshy fruit and palm kernel oil comes from crushing the kernel or the stone in the middle of the fruit. Here’s the overview of the palm oil production process:

1. Palm Tree Cultivation – The process begins with oil palm tree cultivation where farmers carefully choose appropriate land, cultivate the soil, and plant oil palm seedlings. Generally, it takes around 3 to 4 years for the oil palm trees to reach maturity and start fruit production.

2. Harvesting Fresh Fruit Bunches – Once the oil palm trees reach maturity, they produce clusters of fruit known as Fresh Fruit Bunches. Harvesters use specialized tools to cut these bunches from the trees.

3. Transportation to the Mill – The freshly harvested Fresh Fruit Bunches are promptly transported to palm oil mills to uphold their freshness and quality. Mills are strategically located to minimize transportation time.

4. Sterilization – The Fresh Fruit Bunches are first sterilized using high-pressure steam to deactivate enzymes and prevent further ripening of the fruit. Additionally, it softens the fruit, making it easier to extract the oil.

5. Threshing – The Fresh Fruit Bunches are mechanically threshed to extract the palm fruit from the bunch. This process results in a mixture of palm fruit and empty fruit bunches.

6. Digestion and Oil Extraction – Separated palm fruit undergoes digestion, a step that uses heated water to break down the fruit’s structure and release the oil. The resulting mixture of oil, water, and fibrous residue is pressed to extract the crude palm oil.

7. Clarification – The obtained crude palm oil is subsequently separated from the fibrous residue using a clarification process. This involves techniques like centrifugation and the introduction of chemicals to eliminate impurities and achieve clarified crude palm oil.

8. Refining – The crude palm oil goes through a refining process to remove impurities and improve its quality. This includes degumming, neutralization, bleaching, and deodorization, resulting in a refined, marketable palm oil.

9. Packaging and Distribution – The final palm oil products are packaged and prepared for distribution to various industries and consumers.

Overall, palm oil and its derivatives are used in a wide range of applications, including food, cosmetics, pharmaceuticals, and biofuels.

What is the future price of palm oil?

Palm oil is an extremely versatile oil that has many different properties and functions. It is in nearly everything we can find in supermarkets, from pizza, doughnuts, and chocolate, to deodorant, shampoo, toothpaste, and lipstick.

Additionally, it’s also used in animal feed and as a biofuel in many parts of the world. It is also commonly used for frying by fast food chains, as well as industrially manufactured products such as crisps and instant noodles.

Moreover, most processed products such as infant formula contain some amounts of added fat, which comes from palm oil. On the restraint side, the EU’s anti-deforestation rules (EUDR) on agricultural imports will affect palm oil’s marketability as the region shifts to sustainable consumption.

Experts anticipate its market will be worth $88.92 billion, with a price tag of $2,010 per ton in 2025. This price remains subject to change due to factors like demand and supply dynamics, advancements in technology, and a potentially more competitive market.