Palm oil’s higher cost may raise food prices

One of the world’s most popular raw materials is as expensive as it’s been in eight years, a rally that points to higher food prices — and backsliding on biofuel initiatives — in the months to come.

The price of palm oil, an ingredient in about half of all

supermarket goods, is up almost 70 percent since the year’s low in May. Bad weather has disrupted the planting of rival oils, and the supply of palm is also tighter, the result of a shortage of migrant workers on Malaysia’s plantations. At the same time, optimism about a coronavirus vaccine has improved economic forecasts and energized demand.

Palm’s rally has outpaced soybean oil, which has climbed about 52 percent from its March low. Overall, the rising prices suggest food is about to get more expensive at a time when consumers around the world are already under economic stress.

As of now, the effects of palm’s rally may be offset by government stimulus programs and other kinds of COVID-19 assistance for consumers. India, the world’s top palm buyer, slashed crude palm import duties effective Friday to shield consumers from surging prices.

The high prices will, eventually, trigger a contraction in demand, said veteran analyst Dorab Mistry, director at Godrej International. “This always happens over a period of some months,” he said.

The effects of the rising prices on the market for biofuels are murkier. Palm oil is trading at a fat $413 premium to gas oil, the highest premium since 2011. In the nine years since, countries including Indonesia, Malaysia, Thailand and Colombia have enacted mandates to require the use of domestic palm oil in national biodiesel initiatives, while the European Union’s renewable energy policies have boosted the bloc’s imports of palm, with nearly half of that channeled into energy use.

Advocates for biofuels worry that the rally in palm oil prices will push some countries to roll back their mandates.