Oil palm market dynamics gain velocity
Dramatic commodity price movements in recent months are not limited to energy and grains. Palm oil is another area in which pressures are significant and of immediate importance to businesses and households in the region. Longstanding policies to boost output are therefore taking on additional importance while the scale of the opportunity to supply local/regional markets has gained ground. They are accompanied by ESG-related concerns. This is especially true for Nigeria.
Significance – Seed to fruit
International palm oil prices increased by around 50% in 2021, and then another 32% in the first three months of this year. All this before Indonesia, the largest oil palm exporter in the world, announced its plans to restrict overseas sales for some but perhaps not all oil palm products[1]. And even if the recently announced Indonesian ban is narrower in scope than initially feared, and/or lasts for a shorter period, the implications for local actors in our core countries are too large to be ignored given:
The prior 2021 and Q1 2022 palm oil price volatility referenced above
Wider inflationary environment in many countries in the region (see below)
Limited alternative sources of supply locally over the short-to-medium term
Nigeria is the largest producer in Africa. But it is also largest net importer as can be seen in the table adjacent (alongside the other nine top in the region).
The outgoing government[2] hopes to encourage production and move towards net exporter status via lending[3], input distribution and other related schemes[4] often led by the Central Bank of Nigeria (CBN) that would boost productivity locally.
Outlook – Think ESG
Alongside campaigns to boost yield are plans to extend the area under cultivation and this is potentially an area of difficulty. Oil palm cultivation may not be on the exclusion list for impact-oriented investors but there are prominent ESG-related concerns e.g., deforestation and labour conditions. Already, according to Global Forest Watch Nigeria lost 1.14 million hectares or 11% of tree cover between 2001 and 2021. Demonstrating how these risks are mitigated against becomes especially important in that context. The drive toward standards certification is one response.
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[1] The precise scope has not been clear.
[2] This is President Muhammadu Buhari’s last term and elections are scheduled to take place in February 2023.
[3] Anchor Borrowers Programme
[4] Palm oil products are among the items, the import of which is ineligible for foreign exchange access at the official window
Photo credit: Silicone Barbie Doll