The war in Ukraine is shaking the market for edible oils

WVLADIMIR PUTIN’S HEN tanks arrived in Ukraine at the end of February, crude oil markets reacted instantly to the uncertainty and, before long, to the sanctions imposed on Russia, the world’s second largest exporter of black matter. The impact of the war on another set of crucial oils, edible vegetable fats such as sunflower oil, of which Ukraine and Russia are the world’s two largest exporters, has taken longer to digest. Now it’s giving heartburn to the consumer goods giants that use them by the ton to make everything from snack foods to lipstick.

Exports from war-torn Ukraine have almost stopped. Russia has established an export quota for its sunflower oil. Concerns about tight supplies have led countries such as Egypt and Turkey to ban exports of edible oils. And since April 28, Indonesia has banned exports of palm oil, another widely traded variety.

The archipelagic country sold $18 billion worth of material abroad in 2020, accounting for half of all palm oil exports. The move then caused prices, which had dipped after the initial war-induced spike, to spike again (see chart). A ton of palm oil for May delivery is trading at more than $1,700, 70% higher than the average spot price in 2021. This is piling more inflationary pressure on global consumer goods producers and sabotaging their environmental good faith.

Unilever, a soap-to-soup group, spent $2.7 billion on palm oil last year, about 15% of its total commodity spending. Procter & Gamble, a similarly expanding giant, and big packaged-goods firms like Mondelez and Nestlé are in a similar bind. Everyone is paying more for soybeans and other alternative oils, so substituting one type for another would bring little financial relief. Investors often view large consumer companies as resilient to economic downturns. But as input prices rise, some may begin to doubt companies’ ability to pass on extra costs to buyers, who are getting fed up with rising bills.

The ban, which does not have a specific end date, will also complicate companies’ efforts to present themselves as environmentally responsible. Historically, palm oil production has often been at the expense of tropical rainforests, which have been cleared in places like Indonesia to make room for plantations. Today, Nestlé says that 90% of the palm oil it bought in 2021 was certified deforestation-free, thanks to close monitoring of supply chains, from plantation to port. That capability has taken years to develop in Indonesia and will be difficult to replicate elsewhere in the short term. If the Swiss giant and its rivals have to resort to buying oils from more opaque places, that could leave a greasy stain on their carefully manicured green reputations.

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