Indonesia, the world's biggest palm oil producer, banned palm oil exports on April 28. As expected, the move dealt an immediate, huge blow to the global palm oil markets, causing a steep rise in international grain and oil prices. It also raised concerns for global food security.

In response to Indonesia's move, China, as a leading palm oil consumer, needs to make some decisions. It can, for example, promote oil palm cultivation in Hainan province, which is known as China's "Silicon Valley of Seed Industry" and is home to the Hainan Free Trade Port. Promoting oil palm cultivation in Hainan and exporting palm oil to countries involved in the Belt and Road Initiative will not only ensure sufficient supply of palm oil and related products for China and many other countries but also significantly enhance China's overall global influence and its say in the grain and edible/cooking oil sectors.

HK can help Hainan build oil palm base

Besides, Hong Kong, as a global financial and logistics center, could use its strengths to contribute to national development, by collaborating with Hainan's fledgling Free Trade Port. Hong Kong can leverage its powerful financial industry to establish a joint "grain bank" and promote oil palm cultivation in Hainan.

Palm oil is the most produced, consumed and traded edible oil. It is also used in food processing, cosmetics, biofuel and other sectors.

On the other hand, Russia and Ukraine are the two main producers of sunflower seed oil. But the Russia-Ukraine conflict has disrupted the global supply of such oils, forcing global buyers to turn to palm oil as an alternative.

As a result, the demand for palm oil and related products has shot up throughout the world, causing a sharp rise in their prices. For example, in Malaysia, at one point, palm oil prices surged by as much as 25 percent.

Indonesia largest palm oil producer

While Indonesia accounts for more than half of the world's palm oil supply, Malaysia provides about 30 percent for the global market. As global palm oil prices surged way above those in the Indonesian market, many Indonesian palm oil producers increased their exports. This forced palm oil prices to soar 40 percent in Indonesia, prompting the Indonesian government to ban its exports to mitigate the shortage of palm oil in the domestic market.

The problem is that oils that can make up for the global shortage of palm oil are also in short supply. For example, soybean oil and rapeseed oil are considered good alternatives to palm oil, but their current production has fallen significantly, due to severe drought in major soybean producing countries such as Argentina and Brazil, and rapeseed producing countries like Canada. This has forced prices of soybean oil, the second-most consumed vegetable oil in the world, to soar as well. For instance, at the Chicago Board of Trade, the listing price of soybean oil is up 4.5 percent.

Indonesia's ban on palm oil exports has not only reduced edible oil supply and pushed up edible oil prices but also raised the prices of other food products globally, which could pose a threat to global food security.

The palm oil exports ban has had a huge impact on all countries, China included. In recent years, China has had a large edible oil supply gap, with only 40 percent of the needed oil coming from domestic sources. So China is dependent on imports to meet its oil needs, with palm oil being its largest edible oil import. And according to General Administration of Customs data, in the first quarter of 2022, China's main suppliers of palm oil (52 percent) were Indonesia and Malaysia.

Solution to the oil shortage problem

Hainan could be a solution to this problem. The national seed breeding base in Hainan is where scientist Yuan Longping made the key breakthrough in creating hybrid rice. The base has also successfully bred a novel oil palm seed called "Reyou No. 6", which has a palm oil yield of more than 200 kilograms per mu (667 square meters), a global record for any oil crop.

The successful breeding of "Reyou No. 6" and development of the oil palm industry in Hainan in the future can and will help improve China's self-sufficiency in edible oil.

Palm oil is the largest produced and consumed editable oil (40 percent) globally, but only 5 percent of the world's planting area is used for oil palm cultivation. About 43 countries in Asia, Africa and Latin America near the Equator have the unique climatic conditions suitable for oil palm cultivation and coincidentally they are mainly along the Belt and Road routes.

So industrializing oil palm cultivation in these countries can improve the comparative efficiency of the palm oil sector, and meet China's edible oil demand and enhance the country's global influence in the sector.

About 90 percent of China's new seed varieties will be bred at the national seed breeding base in Hainan. And using the "first trial" convenience policy of the Hainan Free Trade Port, the country can turn Hainan into a center for global plant and animal germplasm resources.

Also, a transit base can be set up in Hainan as a facilitator for domestic and foreign breeding materials and promoting global breeders, scientific research institutes and grain enterprises.

Financial services to boost grain production

But to develop the grain industry, one needs to strengthen the financial services by, for example, enriching the product level and integrating the various financial elements such as credit, insurance and leasing into grain production.

According to a recent study by the United Nations Food and Agriculture Organization, if financial support is strengthened, food producers can increase their investments by 13 percent and raise food production by 21 percent. This is where Hong Kong and Hainan come in. They can join hands to explore more possibilities and help establish a "grain bank", which would provide financial services such as mortgage guarantee, risk compensation and agricultural insurance for the grain industry, and offer similar services to Hainan to help it become a global transit base for animal and plant germplasm resources.

And Hong Kong and Hainan can collaborate to develop a variety of robust financial products directly related to grain, in order to strengthen the linkage between the grain market and the currency market, foreign exchange market, futures market and the derivatives market. Such efforts can and will enhance China's financial pricing power in the international grain market, and increase its say in the global arena.

The views don't necessarily reflect those of China Daily.

Feng Da Hsuan is honorary dean of Hainan University Belt and Road Research Institute; and Liang Haiming is dean of Hainan University Belt and Road Research Institute.

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