Palm oil slumped on prospects that top producer Indonesia’s surprise ban of cooking oil exports will not be strict as feared.

Indonesia will only halt exports of bulk and packaged RBD palm olein, a higher value product that has been processed. Exports of crude palm oil and RBD palm oil will still be allowed, according to people familiar with the matter. RBD olein accounts for 30% to 40% of Indonesia’s total palm oil exports.

Benchmark futures initially rallied after Indonesia said Friday that a shipment halt on all cooking oil will start from April 28 and last until the government deems a domestic shortage resolved. The announcement came as a shock to the market as a complete ban would worsen global food inflation and aggravate volatility in crop markets still reeling from the war.

Palm oil for July delivery tumbled as much as 4.1% to 6,097 ringgit ($1,399) a ton in Kuala Lumpur after jumping 7% in early trade. Prices closed 2.1% lower. Soybean oil, palm’s closest rival, retreated from all-time highs in Chicago.

“Details are still scant for now, and traders are reacting on speculation that the impact of the Indonesian ban may be less than initially thought,” said David Ng, senior trader at IcebergX Sdn. in Kuala Lumpur. It will be a slight reprieve for the ban to be limited to olein and not other products, he added.

Fruits of the oil palm tree are crushed to produce crude palm oil. Processing crude palm oil produces refined, bleached and deodorized palm oil, which can be further processed into RBD palm olein. RBD palm olein is primarily used as cooking oils and in industrial frying of processed foods.

The move by Indonesia, which accounts for a third of global edible oil exports, adds to a raft of crop protectionism around the world since the war erupted in Ukraine, as governments seek to protect their own food supply with agriculture prices surging. While the ban excludes some products, it still risks further fanning food inflation, which has been surging at a rampant pace.

Street Protests

Local shortages of edible oils has roiled Indonesia, leading to street protests over high food prices and the detention of a trade official in a corruption case. Managing food prices is a key priority for President Joko Widodo especially as the country that’s home to the world’s largest Muslim population heads into the Eid al-Fitr holiday, usually marked with feasts and celebration. Just days earlier, the industry ministry said distribution of its domestic cooking oils has met national demand, which makes the export ban even more unexpected.

The shortage of domestic supply at retailers, high palm oil prices and strong festive demand may have “triggered the government to press the panic button,” said Sathia Varqa, owner of Palm Oil Analytics in Singapore.

Although inventories are swelling after Indonesia’s export curbs in February and March, there are still problems in the flow of cooking oil from refineries to packaging companies down to retailers, he said. This is hitting availability just as Eid al-Fitr is coming up. “People are excited to celebrate big time after two years of muted celebration due to the pandemic,” he added.