In a hyper-globalised world, countries would largely produce things in which they have comparative advantage and import those others can make at lower opportunity cost. That idea, going back to the 19th century British economist David Ricardo, is being put to the test today in most products, where there’s too much dependence on supplies from one or two countries. The most recent example is palm oil, which accounts for roughly 40 per cent of India’s annual vegetable oil consumption of 22-23 million tonnes. The country’s palm oil requirement is met almost entirely through imports from Indonesia and Malaysia. Indonesia alone has a nearly 60 per cent share of the world’s output and export of this oil. Comparative advantage theory would see this as a good thing. When palm oil is produced in Indonesia and Malaysia or sunflower oil in Ukraine and Russia, it results in “gains from trade” for other countries. They can similarly specialise in industries to concentrate national resources, both for exports and domestic production.
These neat assumptions have been upended by the Russia-Ukraine war, which has not only disrupted sunflower oil supplies, but also driven up international crude prices and made it further attractive to divert palm and soyabean oil for making bio-diesel. Add to this the impact of dry weather on South America’s soyabean crop, it has led to a spike in palm oil prices — so much so to force Indonesia to ban all exports from April 28. It’s rare for any country that is the world’s largest producer and exporter of a product to experience domestic shortages in the same. On Friday, the landed price of imported crude palm oil (CPO) in Mumbai was $1,975 per tonne, against $1,780 a week ago and the $1,173 average for April 2021. Its effects are not just in foods — from vanaspati and margarine to bread, biscuits, noodles, frozen dessert, namkeens and mithai — but also soap and cosmetics made from palm fatty acid distillate that is a byproduct of CPO refining.
