Palm Oil vs Soy Oil 2025 Price Spread and Policy Drivers
Indonesia is implementing a B40 biodiesel blend in 2025 and preparing to roll out B50 by early 2026, diverting an estimated 18 million MT of crude palm oil into domestic energy use.
By K2 Research Team
May 27, 2025, 11:00pm
22 December, 2024
The Art Of Hedging
EXECUTIVE TAKEAWAYS
- Palm oil remains the dominant vegetable oil globally used in food (75%). Global output reached 80 million tons in 2024 with Indonesia and Malaysia supplying 85% of the total market. (S&P Global)
- Structural supply constraints persist as aging plantations in Indonesia and Malaysia limit yield growth. Replanting rates remain low – Malaysia only replanted 114,000 ha (2% of total area) in 2024 versus the 4-5% target. Without accelerated replanting, yield could fall further from the current 3.42 tons/ha, intensifying tightness through 2026. (Reuters)
- Biofuel demand is the key upside driver, supported by Indonesia’s B50 mandate by 2026, Brazil’s Fuel of the Future Law, and the EU’s RED III directive targeting a 29% renewable transport share by 2030. The shift toward cleaner energy continues to absorb edible oil feedstocks, keeping the vegetable oil balance tight. (Circularise, Biofuels International Magazine)
- In August 2025, the FAO Vegetable Oil Price Index rose 1.4% m/m and stood 24.3% higher y/y, reaching its highest level since July 2022.This strength contributed to the FAO Food Price Index up 1.6% monthly gain, highlighting vegetable oils as the largest contributor to overall food inflation. (FAO, FAO)
PALM OIL POLICY SNAPSHOT
Indonesia’s government continues to advance its biodiesel expansion policy, with the Energy and Mineral Resources Ministry officially allocating 15.6 million kl of biodiesel for 2025, up from 12.98 million kl in 2024 as part of the B40 mandate (40% palm-based blend). Of this allocation, 7.55 million kl will be distributed under the Public Service Obligation (PSO) scheme and 8.07 million kl under non-PSO, sold at market price. Implementation of the B40 program-initially planned for January 1,2025-was delayed to February 28,2025, due to technical and subsidy-related challenges. The biodiesel program will require an estimated 68% increase in subsidies, prompting a planned rise in the CPO export levy from 7.5% to 10% to maintain financing through BPDKS, the national palm oil fund.(Channelnewasia, S&P Global)
To secure domestic feedstock for the B40 rollout, the government enacted Trade Ministry Regulation No.2/2025, restricting exports of used cooking oil (UCO), palm oil mill effluent (POME), and high acid palm oil residue (HAPOR). Export permits for these products are now subject to government approval. The policy follows a surge in POME and HAPOR exports, which reached 3.45 million tons (Jan-Oct 2025)-exceeding CPO exports (2.70 million tons) and marking a 20.74% average annual growth (2019-2023). Officials argue that excessive exports risk diverting CPO supply from domestic biodiesel and cooking oil industries. (GAPKI)
The regulatory shift aligns with President Prabowo Subianto’s target for energy self-sufficiency, with plans to escalate blending to B50 in 2026. However, the policy transition has introduced short-term volatility in palm oil markets, with Malaysian palm oil futures dropping 2.6% following the B40 delay before rebounding 1%. Meanwhile, Local POME prices have fallen to around $1,015/mt (FOB Indonesia) amid policy uncertainty and lower CPO reference prices ($1,059.54 in Jan 2025). (Channelnewasia, S&P Global)
SOY OIL POLICY SNAPSHOT
Indonesia’s soybean imports for MY 2025/26 are projected at 2.7 MMT, slightly higher than the revised 2.65 MMT estimate for 2024/25, supported by steady demand from tempeh and tofu producers. From October 2024 to May 2025, imports reached 1.5 MMT, up 1% y/y, despite a 20% global soybean price decline and pressure from a weaker rupiah. The United States remains the dominant supplier, accounting for 88% of Indonesia’s soybean imports, followed by Canada (10%), With imports entering duty-free from all origins (FAS USDA)
Trade relations with the U.S. remain stable after Indonesia refrained from retaliatory tariffs against Washington’s 19% import tariff on select Indonesia manufactured exports, including rubber-based and palm derivative products. TheU.S., in turn, maintained zero-duty access for Indonesian soy imports under existing trade arrangements. However, the current tariffs is 19%, including a proposed US$34 billion bilateral trade deal aimed at improving agricultural market access. (Jakarta Globe, FAS USDA)
On the regulatory front, the European Union Deforestation Regulation (EUDR)-set for enforcement on December 30, 2025-poses compliance challenges for Indonesia and other Southeast Asian suppliers of soy and palm oil. The regulation requires traceability to deforestation-free land, which Indonesia officials argue imposes administrative and data-sharing burdens on small shareholders and raises privacy and benchmarking concerns. Despite these challenges, Indonesia and Malaysia remain the only countries to establish a joint task force with the EU to facilitate EUDR compliance. (EY Indonesia, Mongabay)
CURRENT PALM OIL AND SOY OIL OUTLOOK
Global palm oil production is projected to reach 80.34 million metric tons in 2024/25, up marginally from 79.83 million metric tons the previous year, with Indonesia and Malaysia – which jointly supply 85% of the world’s output-expected to produce 47 million mt and 19.8 million mt. Despite the modest uptick, long-term output faces structural headwinds from aging trees and low replanting rates among smallholders, who account for 40% of plantation area. Reuters analysis exports from both producers could decline by up to 20% over the next five years, as many plantations have exceeded 20 years of tree age, reducing yields. (S&P Global, Reuters)
In market terms, the global palm oil market, valued at USD 72.8 billion in 2024, is forecast to grow USD 98.9 billion by 2030, reflecting a 5.3% CAGR, driven by demand from food (66%), biofuel, and personal care sectors. The Asia-Pacific region accounts for 71% of global revenue, led by India with a 20.2% share. On the trade front, Indonesia’s exports to the EU are projected to rise 4 million mt in 2026, up from 3.3 million mt in 2025, following a free trade agreement and EU’s deforestation law delay, while shipments to India are expected to increase to 5 million mt in 2025. (Grandviewresearch, Reuters)
However, policy and price competition remain pivotal. Argentina’s temporary removal of soybean export taxes has made soyoil cheaper, attracting price-sensitive buyers like India and creating downside risks for palm oil demand. While favorable weather could support short-term yields, structural constraints and policy-driven shifts toward biodiesel feedstock continue to shape a tighter supply outlook for the coming years. (Reuters)
Global soybean production for MY 2025/2026 is projected at 735.7 million metric tons, down 1.8 million tons from last month due to lower output in India, the EU, and Serbia, partially offset by higher production in Russia and the United States. Ending stocks are forecast at 124 million tons, slightly above the previous year. (USDA)
India’s production is lowered to 11.6 million tons amid flood damage in Madhya Pradesh, reducing crush and soybean meal exports while increasing palm oil imports. In contrast, Russia’s production is raised to a record 8.3 million tons on expanded harvested area (4.6 million ha) and stronger exports (2.0 million tons). (USDA)
In the European Union, dry conditions have reduced yields to 2.6 tons/ha, with harvest area down 2% to 1.1 million ha, particularly in Romania. Consequently, EU soybean imports are revised up to 14.3 million tons and soybean meal imports to 17.6 million tons due to higher demand and limited alternative protein sources. (USDA)
In the United States soybean production is forecast at 4.3 billion bushels on higher yields (53.5 bu/acre) and acreage (80.3 million acres). However, exports are trimmed to 1.69 billion bushels amid strong competition from Brazil and Argentina, while crush is raised to a record 2.55 billion bushels driven by higher soybean meal demand. U.S. soybean meal exports are projected at 19.2 million short tons, up 11% y/y, with stronger shipments to Mexico (+21%) and Colombia (+48%), lifting the U.S. share of global meal trade to over 20%. (USDA)
Overall the global soy complex faces tight supply, rising meal demand, and export competition.
DEMAND COMPOSITION
Palm Oil
Edible/Food Uses
Over 75% of global palm oil output is consumed as food-mainly cooking oil-supporting nearly half of the world’s population, particularly across Asia and Africa. Global production rose from 4.5 million tons in 1980 to 80 million tons in 2024, with demand projected to grow 1.7% annually until 2050. Indonesia and Malaysia together supply about 85% of global palm oil, anchoring their economies through employment, infrastructure, and exports. Palm oil yields are up to nine times higher per hectare than rival oils like soy or sunflower, making it the most efficient source to meet growing global demand-expected to reach 310 million tons by 2050-with the lowest environmental footprint. (GAPKI)
Biofuel/Biodiesel Demand
Biofuel policies are driving palm oil demand higher. Indonesia’s B50 biodiesel mandate by 2026 is set to significantly raise domestic consumption. Limited replanting-only 2% of Malaysia’s total area in 2024-and aging plantations have curbed supply, with Indonesia’s CPO yield down 11.4% in a decade. Rising crude oil and soyoil prices (+0.72%), along with a 0.05% weaker ringgit, further boost palm oil’s competitiveness. With Indonesia and Malaysia supplying over 85% of global output, tightening supply and expanding biofuel use point to sustained price strength and shifting trade flows. (Reuters, Finimize, GAPKI)
(Reuters)
Industrial and Oleochemical Uses
The global oleochemicals market, a major driver of palm oil demand, was valued at USD 24.4billion in 2023 and is projected to reach USD 39.4 billion by 2030 (CAGR 7.0%). Asia Pacific remains the largest market, while South Africa is expected to post the fastest growth. Glycerol esters accounted for 25.6% of 2023 revenue, and fatty acid methyl esters (FAME)-used in biodiesel-are forecast to grow the fastest, underscoring palm oil’s expanding role in renewable and biodegradable products. (Grandviewresearch)
Soy Oil
Edible/Food Uses
Global soy oil consumption in 2025 continues to be anchored by the edible food sector, particularly in Asia, North America, and Latin America. Soy oil is a staple in household cooking and processed foods, with strong demand in countries such as China, India, Brazil, and the United States. Global soy oil consumption is projected to increase steadily due to population growth, urbanization, and expanding middle-class diets. While food demand is generally price-sensitive, soy oil’s widespread acceptance and established supply chains mean that it remains a core vegetable oil for many countries’ food security strategies. (Grandviewresearch) (USDA)
Biofuel/Renewable Diesel Demand
U.S soybean oil use for biofuels has surged since 2021, driven by the EPA’s biofuel blending mandates and California’s LCFS. Expanding soybean crush capacity has redirected a larger share of oil to biomass-based diesel, cutting exports and traditional food uses. (USDA)
Industrial and Other Uses
Industrial and food applications now account for a smaller share of soybean oil demand as more output is absorbed by the energy sector. Exports have declined, reflecting policy-driven prioritisation of renewable fuel feedstocks over traditional uses. (USDA)
Livestock Feed and Crushing Dynamics
U.S soybean meal-74% of total crush output-remains the main feed component, but domestic demand has levelled off. Record exports in 2023/2024 followed rapid crush expansion, while more soybean oil stayed in the U.S to support renewable diesel growth, tightening global supply. (USDA)
WHY DOES IT MATTERS
Food security and affordability:
Palm oil, producing about 4 tonnes of oil per hectare-up to 10 times more than soybean-remains the world’s most traded vegetable oil, supplying 30-40% of global demand. In China, it accounts for 20% of the 35 million metric tons of vegetable oil consumed, while in India, it represents 56% of edible oil imports. Its high yield and low cost make it critical for food affordability, yet the FAO Vegetable Oil Price Index rose 18.2% y/y (June 2024-June 2025), heightening food security concerns worldwide. (Indonesiapalmoilfacts, Klipspringer)
Energy transition and emissions reduction:
Global biofuel policy momentum is accelerating as countries align energy transition goals with emission reduction targets. Brazil’s Fuel of the Future Law (2024) raised ethanol and biodiesel blending mandates and introduced GHG limits for aviation fuels. The EU’s RED (2023) targets 29% renewable energy in transport by 20230 or a 14.5% GHG intensity cut, aiming to reduce 32 million metric tons of CO2 annually. Meanwhile India plans 1-5% compressed biogas blending (2025-2029) to diversify its energy mix. These coordinated efforts position biofuels-particularly palm-based biodiesel-as key levers in achieving decarbonization and energy security targets. (Circularise, Biofuels International Magazine)
Trade balances and macroeconomic vulnerability:
Palm oil accounts for 40% of global edible oil supply, with Indonesia (60%) and Malaysia (25%) dominating production. Major importers such as India, which sources 40% of its vegetable oil from palm, and China, are highly exposed to trade restrictions like Indonesia’s 2022 export ban, Soybean oil output is projected at 59 million tonne, led by China, the U.S., Brazil and Argentina, but Argentina’s higher export tax (33%) and weaker harvest reduced global availability. These policy and production shifts have widened trade imbalances and increased import-driven inflation risks across developing countries. (Investing)
IMPACT TO THE STAKEHOLDERS
In August 2025, the FAO Vegetable Oil Price Index rose 1.4% m/m and stood 24.3% higher y/y, reaching its highest level since July 2022. The surge, driven by stronger pal, rapeseed, and sunflower oil prices and Indonesia’s planned 2026 biodiesel mandate, pushed the FAO Food Price Index up 1.6% to 130.1 points. Given vegetable oil’s high weight in global food costs, price gains in this segment remain a key driver of food inflation and input cost pressures worldwide. (FAO, FAO)
Costlier feedstock
The POGO spread-the price gap between palm oil and gas oil-averaged $164.8/mt in 2024, up from $39.8/mt the previous year, sharply increasing biodiesel feedstock costs for Indonesia and Malaysia. A negative spread, last seen in January 2024, makes blending profitable, but the current positive spread has eroded margins. To offset rising costs, Indonesia plans to raise crude palm oil export taxes to fund biodiesel subsidies in 2025, signalling mounting fiscal pressure on biofuel programs. (S&P Global)
The EU Deforestation Regulation (EUDR) threatens Indonesia’s palm oil sector by reducing export demand, which could lower national revenue, market prices, and farmer’s incomes. Economist Eugenia Mardanugraha from LPEM UI argues the EUDR serves as a price control mechanism for Europe, potentially disrupting Indonesia’s export profits and production levels. She highlights the urgency for Indonesia to develop a stronger pal oil financial market to reduce external dependence and stabilize industry resilience. (Astra Agro Lestari, HPNC Counsels)
SIGNALS TO TRACK
POGO Spread (Palm Oil vs Gasoil Differential)
The POGO spread is a critical measure of biodiesel feedstock attractiveness. In 2024, Malaysian palm oil futures vs ICE gasoil Singapore saw the spread widen, putting significant cost pressure on blending economics. A narrowing spread supports expansion of biodiesel blending;a tighter POGO encourages palm biodiesel production in Indonesia and Malaysia (S&P Global, S&P Global)
Export Restrictions on UCO/POME/Residues (Indonesia’s Trade Ministry Regulation No. 2/2025 and enforcement)
From 8 January 2025, Indonesia’s Trade Ministry Regulation No. 2/2025 amended export rules to require government approval for UCO, POME, and palm reesidue exports, and in many cases suspend export permits applications. This export control aims to preserve feedstock for domestic biodiesel (B40 mandate) by limiting outward flows; in 2024, UCO and residue exports from Jan-Nov fell 13.75% y/y (to 3.95 million tons) following the earlier restrictions. (GAPKI, Reuters)
Biodiesel Mandate Uptake and Export Levy Adjustments
Indonesia’s biodiesel allocation for 2025 was set at 15.6 million kl, up from 12.98 million kl in 2024, as part of B40 blend policy. To finance subsidies and manage revenue, Indonesia is planning to increase its CPO export levy from 7.5% to 10%. (Channelnewsasia, S&P Global)
Replanting Rates / Plantation Age Structure
Supply-side risk is growing: Malaysia replanted only 2% of its total planted area in 2024 versus a target 4%,constraining future yield recovery. In Indonesia, aging has caused yield declines-CPO yields are reported to have fallen 11.4% over a decade, partly because many estates exceed 20 years without renewal. (S&P Global, Reuters)
Soybean Crush & Oil Extraction Trends (US & Global)
Crude soybean crush expansion, particularly in the U.S., reallocates more soy oil toward biofuels, tightening exportable soy oil and thereby influencing the palm-soy spread.
U.S soybean crush reached a record 2.55 billion bushels in 2025, with exports of soybean meal projected at 19.2 million tons, up 11% y/y. (USDA)
Global Vegetable Oil Price Benchmarks (FAO)
The FAO Vegetable Oil Price Index is a useful aggregate signal: y/y increase, currently 24.3% (August 2025) above the prior year, reflects systemic tightening across edible oils which cascades into policy responses and price spreads. (FAO)
SCENARIO ANALYSIS
Base Case (Most Likely to Happen)
Assumptions:
– Global vegetable oil demand expands moderately in 2025, supported by steady biodiesel mandates and stable food consumption. Indonesia’s B40 rollout continues after initial delays, with CPO output at 47 million tons, while soybean production stabilizes at 735 million tons under favorable U.S. weather. Crude oil prices hover between USD 80-85/barrel, maintaining biodiesel competitiveness. No major policy shocks emerge from EU’s deforestation regulation before its December 2025 enforcement.
Output:
– Palm oil prices average around USD 950-1,050/ton, while soy oil trades near USD 1,100/ton, keeping the palm-soy oil price spread around USD 80-100/ton. The FAO Vegetable Oil Index holds within 160-170 range, contributing to a stable global food price environment. Export flows from Indonesia and Malaysia remain resilient, while soy oil margins tighten slightly as U.S. biofuel demand absorbs domestic supply. (FAO, Circularise)
Low Case
Assumptions:
– A recovery in American soybean output and Argentina’s continued suspension of export taxes flood global markets with cheaper soy oil. Crude oil prices soften to USD 70/barrel, reducing biodiesel profitability and slowing demand in Asia. Indonesia’s biodiesel subsidy faces fiscal pressure, limiting B40 execution. Global food demand remains flat due to weak macroeconomic growth.
Output:
– Soy oil prices decline to USD 950-1,000/ton, while palm oil weakens toward USD 900/ton, narrowing the spread to USD 50-70/ton. Lower biodiesel use leads to higher inventories, easing pressure on import-dependent economies like India and China. The FAO Vegetable Oil Index falls below 160 points, signalling short-term relief for global food inflation. (FAO)
High Case
Assumptions:
– Adverse weather in Southeast Asia and America reduces yields, while Indonesia accelerates the B50 mandate of schedule. Crude oil prices rally to USD 95-100/barrel, spurring stronger biofuel demand. EU deforestation compliance costs tighten exports from both palm and soy oil suppliers, limiting global supply.
Output:
– Palm oil prices climb to USD 1,150-1,250/ton, while soy oil reaches USD 1,300/ton, widening the spread to USD 120-150/ton. The FAO Vegetable Oil Index exceeds 135 points, pushing the FAO Food Price Index above 130 points and reigniting food inflation concerns. Importing nations face higher subsidy burdens, while biodiesel producers in Indonesia and Malaysia benefit from improved margins despite fiscal strain. (S&P Global, Channelnewsasia)
INVESTMENT VIEWS & ACTIONS
For Commodity Investors/ Funds:
Long-term exposure to palm oil may be attractive given tightening supply from aging plantations in Indonesia and Malaysia, coupled with rising domestic biodiesel demand (B40/B50 mandates). Expected export constraints on UCO, POME, and HAPOR may further limit global supply. Hedging via futures or options can mitigate short-term volatility, especially around POGO spread fluctuations, crude oil price movements, and policy announcements.Diversified vegetable oil portfolios should monitor soy oil availability, as U.S. supply adjustments (crush volumes, exports) could widen palm-soy spreads (S&P Global, FAO)
For Palm/Soy Oil Investors:
Palm oil investors should factor in the planned CPO export levy increase (7.5% to 10%) and domestic blending mandates that support price floors despite international market volatility. Aging trees and low replanting rates suggest a structural supply constraint. Soy oil investors must track U.S. crush rates, production, and Argentine export export taxes. Policy-driven shifts towards biofuel feedstock may reduce soy oil availability for traditional markets, creating price pressure. Consider exposure to biofuel-linked products, such as FAME in oleochemicals, where palm oil demand is projected to grow fastest. (Channelnewsasia, USDA, FAO)
For Traders/Procurement:
Track POGO spread to optimize purchase and blending decisions; wider spreads favor holding palm oil inventory for domestic biodiesel blending, while narrower spreads encourage export opportunities. Monitor global vegetable oil indices (FAO) as leading signals for price spikes, particularly for palm, soybean, and sunflower oils, to anticipate input cost changes. Hedging and staggered procurement can mitigate volatility, especially ahead of Indonesia’s B50 implementation in 2026. (S&P Global, USDA, FAO)
For Policymakers & Corporates:
Policymakers should consider supply-side constraints in palm oil when designing export restrictions and biodiesel mandates, balancing domestic energy security with global trade impacts. Invest in sustainable plantation renewal programs to avoid long-term yield declines and potential price shocks. Corporates reliant on vegetable oils (food processors, biofuel producers) should diversify feedstock sourcing, build traceability systems for EU deforestation regulation compliance, and hedge against commodity and currency volatility. (GAPKI, EY Indonesia)