KUALA LUMPUR/JAKARTA - Prices of cooking oil could be buoyed up for years by stagnating production and a biodiesel push in top producer Indonesia that are making traditionally cheap palm oil costlier, eliminating an advantage that also curbed prices of rival oils.

Used in everything from cakes and frying fats to cosmetics and cleaning products, palm oil makes up more than half of global vegetable oil shipments and is especially popular among consumers in emerging markets, led by India.

After decades of cheap palm oil, thanks to booming output and a battle for market share, output is slowing and Indonesia is using more to make biodiesel, according to respected industry analyst Dorab Mistry. "Those days of $400-per-ton discounts are gone," he stated, adding that "palm oil won't be that cheap again as long as Indonesia keeps prioritizing biodiesel."

Indonesia has increased the mandatory mix of palm oil in biodiesel to 40% this year and is studying moving to 50% in 2026, alongside a planned 3% blend for jet fuel next year as it seeks to curb fuel imports. The biodiesel push is expected to reduce Indonesia's exports to just 20 million metric tons in 2030, down a third from 29.5 million in 2024, estimates Eddy Martono, chairman of the southeast Asian nation's largest palm oil association, GAPKI.

Jakarta's biodiesel mandate, coupled with lower production due to floods in neighboring Malaysia, has already lifted palm oil prices above those of rival soyoil, leading buyers to cut their purchases. In India, the largest buyer of vegetable oils, crude palm oil (CPO) has consistently commanded a premium over crude soybean oil for over six months, at times exceeding $100 per ton. As recently as late 2022, palm oil traded at discounts surpassing $400.

Currently, Indians are paying approximately $1,185 a ton for crude palm oil, a significant rise from less than $500 in 2019. These increasing vegetable oil prices could complicate governments' efforts to manage inflation across palm oil-reliant nations and those dependent on other oils like soybean, sunflower, and rapeseed.

Palm oil production, dominated by Indonesia and Malaysia, had nearly doubled each decade from 1980 to 2020, despite facing criticism over deforestation for adding plantations. However, production growth has stagnated recently due to space limitations for new plantations and a slow replanting process, particularly in Malaysia. As the demand persists, new production growth averages only about 1% annually, influenced by labor shortages, ageing plantations, and the spread of the Ganoderma fungus affecting yields.

According to analyst Thomas Mielke, production growth is projected to average only 1.3 million tons a year in the current decade, less than half of previous averages. The reluctance to replant is evident, with Malaysia only replanting 2% of its total area in 2024 versus a target of 4% to 5%. In Indonesia, yields of crude palm oil have fallen by 11.4% over the past decade to 3.42 tons per hectare.

Despite the emergence of palm oil producers in new regions like Colombia, Ecuador, and Nigeria, industry experts express that these new players cannot adequately address the rising demand, especially for biofuel. Mistry and Mielke strongly advocate that Indonesia must resume issuing new permits for palm oil plantations, a practice suspended in 2018. Failure to do so could lead to an unstable supply, high prices, and hardships for billions dependent on this essential commodity.

Even with rising prices, demand for palm oil remains robust, driven largely by its use in the chemicals and biofuels sectors. "We foresee a huge demand increase for palm oil and, given the limited land, there will likely be ongoing demand-supply imbalances," remarked Harish Harlani from P&G Chemicals. The ripple effects of higher palm oil prices may also extend to rival oils as buyer shifts occur, impacting their prices as well.

Ultimately, "as buyers switch to soy and sunflower oils, those prices will soar too," says Sanjeev Asthana, CEO of India’s Patanjali Foods Ltd. "There’s a finite availability of those oils, meaning they cannot completely substitute palm oil's place." This situation underscores the complexities and evolving dynamics within the global vegetable oil market.