Regulating the Market

JUAN BARRETO

Members of the Ukrainian community take part in a demonstration against the Russian invasion in Ukraine in front of the Russian Embassy in Bogota, on March 5, 2022.

A crisis marks an uncontrollable situation followed by a great disturbance that leads to a situation of panic. The same thing has happened with the recent cooking oil crisis. Mitigation efforts through the issuance of six Trade Ministry policies have not even been able to make the commodity available at affordable prices. The regulations have not been able to establish balance between the market mechanism and the public interest.

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There are at least two fundamental factors that have triggered the cooking oil crisis. One is the increase in global commodity prices, especially the price of crude palm oil (CPO). The other is a failure to design and implement a regulatory framework for the domestic cooking oil market. Commodity prices are closely linked to global developments that cannot be influenced. Therefore, better mitigation is needed in the design and implementation of regulations for the domestic market.

The war has triggered the worst commodity crisis in both food and energy since 1973.

The global commodity crisis is expected to intensify after the Russian invasion of Ukraine. The war has triggered the worst commodity crisis in both food and energy since 1973.

Russia is the largest wheat producer, accounting for about 18 percent of total global production. Together with Ukraine, the two countries account for about 25 percent of the share in global wheat production. The longer the conflict between Russia and Ukraine lasts, the more severe the wheat crisis will become, and it is predicted to be the worst wheat crisis in the last 100 years.

The price of West Texas Intermediate (WTI) crude oil touched US$123.70 per barrel on 8 March, following the Russian invasion. The prices of coal and CPO were likewise affected.

AP/EVGENIY MALOLETKA

A woman crosses a checkpoint from the territory controlled by Russia-backed separatists to the territory controlled by Ukrainian forces in Novotroitske, eastern Ukraine, Monday, Feb. 21, 2022. World leaders are making another diplomatic push in hopes of preventing a Russian invasion of Ukraine, even as heavy shelling continues in Ukraine’s east.

On the one hand, the increase in commodity prices benefits our economy. Indonesia’s balance of trade recorded a surplus of $3.83 billion in February 2022, up from a surplus of only $960 million in January. In terms of customs and excise revenues, the increase in commodity prices will add to the already high revenue potential. In January 2022 alone, customs and excise revenue reached Rp 24.9 trillion, while export duty revenues soared 225 percent.

The war in Ukraine has helped our fiscal revenues so as to reduce the deficit. Foreign exchange reserves are also expected to continue to rise. This can be used as capital to cope with exchange rate pressures due to the United States Federal Reserve’s monetary policy tightening.

On the other hand, the increase in commodity prices due to the war has also created problems. Regulating adequate domestic supply of several basic commodities is growing increasingly challenging. Moreover, this is occurring when domestic market regulations seem unable to control the dynamics caused by the surge in global prices.

Market mechanism

Prior to the Ukrainian crisis, commodity prices tended to rise as a result of post-pandemic bottlenecks in the global supply chain. As soon as economies started to recover, prices rose because of an insufficient supply of goods. In respond to this trend, our government has adopted a policy of restricting the exports of several main commodities, particularly coal and CPO.

This is why the government has imposed the domestic market obligation (DMO) on coal and CPO. Unfortunately, both measure have failed in regulating the market.

The soaring price of coal has reduced the supply distributed to the State Electricity Company (PLN). Meanwhile, the increase in CPO prices has led to a decline in raw materials for cooking oils in the domestic market. This is why the government has imposed the domestic market obligation (DMO) on coal and CPO. Unfortunately, both measure have failed in regulating the market.

The obligation for businesses to meet a DMO amounting to 25 percent of their total coal output, as stipulated in the Decree of the Energy and Mineral Resources Minister No. 22.K/30/MEM/2020, is only 11 days old. Meanwhile, the Trade Minister finally revoked on Wednesday (16/3/2022) the policies on a mandatory supply for domestic needs and on fixed palm oil prices. These two regulations are to be replaced by increasing the export levies and duties for CPO, so producers will be more interested in selling the commodity in the domestic market.

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Implementing two rules at once, namely the export restrictions and the fixed retail price, has led to the commodity’s unavailability in the market. Cooking oil once disappeared from distribution. Market operations have been unable to meet domestic needs, and have caused a sharp decline in supply. From this arose accusations about cartel practices in the cooking oil market.

AP/VINCENT YU/VY

A woman stands in front of TV screens broadcasting the news of Russian troops that launched their attack on Ukraine, in Hong Kong Thursday, Feb. 24, 2022. Russian troops launched their anticipated attack on Ukraine on Thursday, as President Vladimir Putin cast aside international condemnation and sanctions, warning other countries that any attempt to interfere would lead to "consequences you have never seen."

The structure of the cooking oil market tends to be controlled by a handful of businesses. Four enterprises control more than 40 percent of the market share for cooking oil, so a handful of actors are able to control supply and prices. Nevertheless, the government has policy instruments and the authority to regulate the market mechanism.

In principle, the market mechanism cannot be resisted, but can be managed with various incentives. This is the framework for controlling the cooking oil market.

What about other commodities aside from staple goods like cooking oil?

The problem is that the policy for regulating the market must be designed at the technical level, such as certainty and supply control. In the case of nine basic commodities as regulated in Presidential Regulation No. 66/2021, supply can be managed through the National Food Agency. What about other commodities aside from staple goods like cooking oil?

To regulate the market, apart from using instruments to provide incentives, such as subsidies, an institutionalized system that can control the behavior of market participants is also needed. After a policy is taken, coordination and monitoring in the field is key.

That the Trade Ministry issued six regulations shows a discrepancy in the process, from planning policy to implementation, and to actions against irregularities.

The cooking oil crisis is the most obvious test of regulatory quality. The bigger the crisis, the more real the demand for regulatory changes will become. There is no need for the government to wait for the crisis to grow bigger before it makes real improvements in various market regulations for the future.

The Ukraine war is likely to change the course of the global economy. Various crises are expected to continue, such as in food commodities. To face the changing situation, the government needs to improve its ability to coordinate and communicate effectively with market participants in order to regulate the market when necessary. This is to protect domestic interests, such as the future availability of food.

KOMPAS/HERU SRI KUMORO (KUM)

A. Prasetyantoko

A. PRASETYANTOKO, Rector, Atma Jaya Catholic University

(This article was translated by Hyginus Hardoyo)