Palm oil crisis could lead to global food price hikes

Palm oil provides more than half of the world’s vegetable oil supply, with Indonesia and Malaysia producing 85 percent of crude palm oil. According to a Reuters analysis, the two countries’ combined exports are expected to fall to 37 million tonnes by 2030 – a 20 percent drop from 2024 levels.

Aging trees, delayed decisions

The primary reason for the decline in production is the age of the plantations: more than half of Malaysian smallholders have trees well past their peak production period. The government officially estimates this rate at 37 percent, but industry sources say the real figure is much higher. For example, an 85-year-old Malaysian farmer decided not to replace his old trees because he would not be able to survive the 3-5 year transition period until the new plantation would bear fruit.

The situation in Indonesia is no better: although the government set a target in 2016 of replanting 2.5 million hectares by 2025, only 10 percent of the target has been achieved. Land ownership issues, complex support conditions and an aging population are hindering the process. In both countries, smallholders account for more than 40 percent of palm oil production, making their position crucial for the stability of the entire market.

Slow supply growth, accelerating demand

Demand, on the other hand, is growing steadily: global demand is forecast to grow by 50 million tonnes by 2050. This would require a supply increase of at least 2 percent per year, but based on current trends, growth is only around 1.5 percent per year, warns M. R. Chandran, former president of the Malaysian Palm Oil Association.

The supply shortage is already affecting the market: while palm oil used to be significantly cheaper than soybean oil, last year the price difference per tonne reversed, with palm oil already trading at a $39 premium to soybean oil. A year earlier, it was trading at a discount of $160.