In the basket of global vegetable oils that comprises oils of soy, rapeseed, sunseed, cottonseed, groundnut, coconut and a few more oil crops, palm oil stands out for its dominance. Palm oil represents a third of world vegetable oil production of about 235 million tons and 60% of world trade of about 80 million tons.

Indonesia and Malaysia, two of the world’s largest palm oil producers, represent 80% of global production and 90% of world export. Thailand, Colombia, Nigeria, Ivory Coast are minor producers. .

Vegetable oil or edible oil is consumed as food in households and in food processing industries. Demand for cooking oils has been rising mainly in populous developing economies like India due to a combination of rising incomes, demographic pressure and low per capita availability.

Over the last two decades, we have seen this essential food ingredient (vegetable oil) increasingly converted into fuel (biodiesel) for blending with traditional mineral oil diesel in some proportion: 10%, 20%, 30% etc.

Usually crude palm oil (CPO) prices trade at a discount ($ 50 to $ 100 a ton) to soft oils (soy, rape, sun oils) which makes palm oil the favourite cooking oil in price conscious import markets like India

Something unusual happened in the first three quarters of this calendar year. Palm oil was trading at a premium to soft oils. Anticipated tepid growth in output and threat of greater diversion for biodiesel purposes especially in Indonesia kept palm oil prices elevated.

As a result of high prices, palm oil started to lose market share while production of soft oils like soyoil expanded markedly making its price relatively more attractive. Global soybean production reached a new high of over 420 million tons in 2024-25 and prospects for 2025-26 are equally good.

Currently the world is at the intersection of oilseed harvest in the northern hemisphere (including India’s Kharif crop), oilseed planting in the southern hemisphere (and Rabi season planting in India) and the end of peak production season for palm oil and start of lean season (December to March) when output growth slows.

Demand slows during winter months as palm oil solidifies at low temperatures. The requirement of palm oil for the upcoming Chinese New Year and Ramadan in major markets is already covered. Currently, demand conditions are weak.

From $ 1200 a ton earlier this year, CPO rates are currently struggling to hold on to even $ 1000/t level. At the Malaysian derivatives exchange, 3-month forward price is range-bound between Ringgit Malaysia (RM) 4000 and 4100 a ton.

Upset with the ongoing price softness, palm oil producers are now attempting to reverse the price direction. They are ‘talking the market up’. For instance, Indonesia has announced its intention to go from the current B40 to B50, the share of palm oil based biodiesel for blending with mineral oil diesel for vehicles.

Based on this, some market experts have forecast CPO price to spurt by as much as

25% from the current levels to reach RM 5,000/t or even higher in the coming months. This is sending out wrong signals to market participants.

It is necessary for value chain participants to understand the true dynamics of the market and commodity fundamentals. From B35 earlier, Indonesia mandated B40 beginning 2025, but is clearly struggling to meet the target as it involves huge fiscal burden. 

On current reckoning, B50 is unrealistic and its implementation has been postponed to the second half of 2026. Vehicle engines will need modification and retrofitting.

Importantly, the world mineral oil market is facing an anticipated oversupply situation that has sent Brent crude prices well below $ 65 a barrel, moving towards $ 60 a barrel. The outlook for 2026 is that Brent would trade around the consumer friendly price of $ 60 a barrel with some downward bias.

Under the circumstances, the justification for diverting palm oil or any other vegetable oil for biodiesel weakens. The incentive for discretionary blending has all but evaporated. Only government mandated blending would continue that too with heavy fiscal implication.

All these are likely to keep vegoil prices on leash. It is necessary for value chain participants to exercise caution and not get carried away by exaggerated bullish price forecasts.

Importantly, there is a lesson for the Indian government. On May 31 this year the government slashed the basic customs duty on crude vegetable oils including CPO by 10 percentage points. This was unwarranted and avoidable considering domestic supply-demand fundamentals and domestic oilseed growers’ interest.

The government attempted to justify the duty cut saying it wants to support the edible oil refining industry. But New Delhi failed to talk about the revenue sacrifice the decision entailed, an estimated at Rs 8,000 crore so far. It was a windfall for large importers-refiners.

Now with bullish price forecasts that are sure to get wide publicity in the media, there would be an attempt to lobby the government for a further reduction in customs duty. It would be tragic if New Delhi succumbed to lobby pressure.

In reality, it is time to restore status quo ante by hiking the basic customs duty on crude vegetable oils to 20% ad valorem. The move would help to protect the interests of domestic oilseed growers, encourage them to plant more and generate more revenue for the exchequer.

It is unfortunate the government lacks commercial intelligence relating to global market dynamics and price outlook of key food commodities. Instead of data-based proactive policymaking, New Delhi simply reacts to market developments that often fail to deliver desired outcomes.