Mint Explainer: How rising palm oil prices impact India and its consumers

Shares of the company plummeted 9% on Monday, marking its worst trading day since March 2020. The selloff reverberated across the fast-moving consumer goods (FMCG) sector, dragging the consumer goods index down by 2.2%. Godrej Consumer Products cautioned about stress on demand and profit margins for the third quarter, amplifying concerns in the sector.

The warning followed the Indian government’s September decision to hike import duties on crude and refined palm oil by 20 percentage points. This policy change came as global palm oil prices were already climbing due to supply constraints in Southeast Asia, creating a perfect storm for manufacturers.

This double whammy has left makers of toiletries, packaged foods, and snacks scrambling to protect margins. In their commentary following the September quarter earnings, several companies highlighted rising costs and the challenges of sustaining margins.

In response, many manufacturers have raised prices or reduced product sizes, with analysts warning of continued pressures in the coming months. Companies such as Hindustan Unilever and Britannia have also flagged concerns about earnings as they adapt to higher input costs.

Read this | Edible oil, tea, coffee, soap to see higher prices this quarter

Mint explains what’s driving palm oil prices higher and how these changes are impacting consumers.

Why are palm oil prices rising?

Indonesia, the world’s largest palm oil producer, accounts for nearly 60% of global supply, while Malaysia contributes about 25%. Both countries are grappling with reduced output due to extreme rains and flooding, which have delayed harvesting. Additionally, export levies imposed by Indonesia and Malaysia have pushed up global prices.

Compounding the issue is Indonesia’s biofuel initiative, which plans to increase the mandatory blending of diesel with palm oil from 35% to 40% next year. This policy is expected to boost domestic demand and reduce export availability, tightening global supply further.

Read this | In charts: Will rising edible oil prices fry your kitchen budget?

India, the largest importer of palm oil, has also felt the pinch after the government raised import duties on crude and refined palm oil. Effective duties, including additional cesses, now stand at 27.5% for crude palm oil and 35.75% for refined oil.

Why did India raise import duties?

India imports over 70% of its edible oil requirements, with palm oil accounting for half of this demand. While households use palm oil for cooking, industrial users—like packaged food manufacturers—consume a significant portion.

The government increased duties to support domestic oilseed farmers, encouraging them to diversify into crops like soybeans and groundnuts. 

“By raising the landed cost of imported edible oils, these measures aim to enhance domestic oilseed prices, support increased production, and ensure that farmers receive fair compensation for their produce," a government statement noted.

The policy, while supportive of farmers, has inadvertently strained bulk users and consumers as companies pass on higher costs through price hikes or reduced product sizes.

How are consumers affected?

Manufacturers of packaged edible oil have responded to higher import levies by raising retail prices, passing the increased costs directly to consumers. Bulk users, such as industrial units, have also faced higher input costs due to the dual impact of elevated global prices and increased duties. 

Most listed companies have warned investors of margin pressures persisting for a few quarters, as they plan to pass on the higher costs gradually. Weak urban consumer demand has constrained companies from fully passing on these costs.

Read this | Mint Explainer: Why urban India is spending less

Nevertheless, in recent weeks, manufacturers have either increased retail prices where possible or reduced product grammage. For instance, packaged food makers like Bikaji Foods, which sell snacks at fixed price points such as ₹10, have reduced the weight of servings per packet. Britannia, meanwhile, plans to implement a 5% price hike across its entire portfolio.

Soap manufacturers are also feeling the pinch, employing various strategies to cope with the rising cost of palm oil. Some are raising prices, others are reducing grammage, and a few are altering formulations to lower palm oil content. 

For soap makers, palm oil provides the total fatty matter essential for soap structure. Godrej Consumer Products has opted to maintain the fatty matter proportion, passing on higher costs gradually. Hindustan Unilever, on the other hand, has revised its soap formulations over the past few quarters, replacing a portion of palm oil with polysaccharides, vitamin blends, and skin actives.

The impact of higher palm oil prices extends beyond soaps and edible oils, permeating almost all packaged food products. Items such as noodles, potato chips, savouries, soup powders, cake mixes, and frozen desserts are also witnessing price adjustments or reduced sizes to mitigate cost pressures.

Can consumers expect relief soon?

Relief may be slow in coming.

Global palm oil prices are expected to remain elevated in the near term, contingent on Indonesia’s biofuel programme and improvements in supply. Declining prices of alternative vegetable oils like soybean oil could help ease some pressure on palm oil prices.

Export levies imposed by Indonesia and Malaysia may be reconsidered to improve supply. Malaysia has hinted at exempting export levies for shipments to India to maintain competitiveness.

Also read | Q2 results: How urban slump, input costs threw FMCG off gear

Domestically, a reduction in India’s import duties could provide the most immediate respite for consumers and industrial users. However, such a move would require careful balancing of domestic farming interests with inflationary pressures.