Distributive policy

Indonesian Palm Oil Policy at a Crossroads: Why Government Interventions Are Ineffective

Indonesia has made several policy interventions to stabilize the price of cooking oil and address the causes of a gap between supply and demand for crude palm oil (CPO).

Yet short-term policy interventions created more problems than they solved, failing to allocate resources for optimal use in the economy.

Indonesia has been facing a cooking oil price crisis since late last year, due to several factors including supply shortage, distribution issues and international factors such as war. between Russia and Ukraine.

Meanwhile, HPB prices have continued to rise since May 2020. Prices in May 2022 showed an increase of 52.23% compared to the average HPB prices in 2021, rising from Rp 10,795 per kg (74 US cents per kg) at Rp 16,433 per kg.

The higher prices and shortage of CPO supply can be attributed to domestic and international circumstances. The war between Russia and Ukraine, for example, has resulted in a tight supply of vegetable oil on the international market. Other factors include the increasing use of CPO for biofuel blending following weather disruptions.

Unfortunately, government interventions in CPO trade and distribution have not yielded satisfactory results. Policy changes have been frequent since the start of the year, indicating a series of failures to ensure consumer access to affordable cooking oil and productive incomes for farmers.

Short term policies

First, the government set a ceiling price (Harga Eceran Tertinggi/HET), a domestic market obligation (DMO) and a domestic price obligation (DPO). But these policies have proven ineffective in ensuring the availability and affordability of cooking oil for domestic consumers.

DMO and DPO were put in place earlier this year, revoked in May but reinstated in June.

The DMO policy requires companies to distribute one liter of cooking oil for domestic consumption for every three tons of their CPO exports. Meanwhile, a DPO ensures that consumers can purchase products within a price range set by the government.

From July, the government promises that consumers will be able to buy cooking oil in bulk at Rp 14,000 per liter or Rp 15,500 per kg through the PeduliLindungi app or by showing an ID card. This was to trace the distribution and limit the purchase of bulk cooking oil to 10kg per person per day.

The government has attempted to ensure the availability of CPO stocks in the domestic market with these instruments. But these instruments, due to complex national factors such as competition with biodiesel, market structure, oil palm productivity and logistics, failed to ensure that national stocks were allocated to the industry. cooking oil.

Second, the government imposed an export ban, hoping that a dramatic increase in domestic CPO supply would curb rising cooking oil prices. However, instead of keeping prices low, the policy caused the prices of the fresh oil palm fruit bunch to plummet, prompting protests from farmers.

Third, the government lifted the ban at the end of May after a likely increase in supply, to be replaced by another short-term policy intervention, the “dump” program to accelerate CPO exports. .

According to Coordinating Minister for Maritime Affairs and Investment, Luhut Pandjaitan, the “emptying” program – stipulated in Commerce Ministry Regulation No. 38/2022 issued in June – aimed to export at least one million tonnes of CPO by July 31. 2021. It was planned to increase the uptake of oil palm fruits for exports, thereby increasing their prices for domestic farmers.

The regulations allow exporters not registered in the Bulk Cooking Oils Information System (SIMIRAH) to export on the condition that they pay the government an additional fee of US$200 per ton.

It remains to be seen whether this regulation can effectively stabilize the price of oil palm fruits.

Since the reopening of the export tap, the government has issued 251 permits for the export of 302,000 tonnes of CPO.

However, the demand for CPO weakened in May and June 2022. Two of Indonesia’s largest CPO importers, China and India, reduced their CPO imports from Indonesia.

India’s CPO imports in May stood at 514,022 tonnes, 10% lower than in April. Meanwhile, Chinese palm oil imports in the first quarter of 2022 fell sharply by 65.7% compared to 2021.

While the ongoing lockdown was behind the drop in demand from China, the drop in demand from India was linked to its increased imports of other vegetable oils such as soybean and sunflower.

How does this affect the global CPO business

Following the release of the flush out program, global CPO prices in the second week of June fell 8.02% weekly and 11.23% monthly. As of the close of trading on June 10, 2022, CPO futures prices for June, July, and August contracts, respectively, were down 6.31%, 7.97%, and 8.26%.

This indicates a global oversupply of CPO, attributed to the surge in CPO exports from Indonesia. As long as global demand for CPO remains weak, we can only temporarily achieve the goal of increasing palm fruit prices by boosting exports.

According to a World Bank study, commodity-exporting countries often try to mitigate market volatility by regulating supplies. But history shows that such efforts are costly and usually counterproductive. An example is Indonesia’s export ban.

The drastic changes on the supply side brought about by the export bans have negative effects, such as the fall in prices of oil palm fruits. In addition, the study highlights that some countries still depend on exports of only a few commodities. The current crisis and rising commodity prices should be a wake-up call for these countries, including Indonesia, to diversify their economies and find sustainable alternatives to commodity trading.

How should the government deal with this problem?

Reflecting on previous interventions on palm oil, the government should improve the certainty of its trade governance by reducing abrupt policy changes and cutting red tape, such as those carried out to verify compliance with the MDG.

Instead of offering a “dump” program with a price of US$200 per ton as a shortcut, the reduction of political flip-flops and the bureaucratic trade maze should encourage shipments, free up producer inventory and encourage the uptake of oil palm fruits.

On the other hand, the protection of vulnerable consumers in these difficult times should be pursued through better targeted food subsidies, such as cash and non-cash food aid.

These are of course among the questions looming over Indonesia’s next trade moves. With a new trade minister in place, the jury is still out on the direction of Indonesia’s palm oil and food price policy. Let us also not forget the complexity of the palm oil value chain, which requires more than market instruments, but also agricultural and land policy, fiscal tools, social assistance, logistics and infrastructure to work well.