DMO Policy Reimposed

AFP/GETTY IMAGES/SCOTT OLSON

Cooking oils made from canola from Canada are offered for sale at a grocery store on April 26, 2022 in Chicago, Illinois. The price of cooking oil has been rising globally as the war in Ukraine has limited the supply of sunflower oil, a drought in Canada has decreased the supply of canola oil, and Indonesia, the world's largest exporter of palm oil, recently announced a ban on its export as it deals with shortages and rising prices domestically.

JAKARTA, KOMPAS — The government has again imposed a palm oil domestic market obligation (DMO). This policy is adopted to ascertain that cooking oil stocks to meet domestic demand remained under control after the export of crude palm oil (CPO) and its derivative products were reopened as of Monday (23/5/2022).

Coordinating Economic Minister Airlangga Hartarto at a press conference on Friday (20/5) confirmed that the DMO policy would be followed by efforts to guarantee basic material supply and domestic cooking oil price stability. The policy will regulate two aspects — the supply obligation quota for palm oil producers to meet domestic demand and the domestic price obligation (DPO), which is the selling price of the cooking oil basic material for producers.

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Regarding the quota, the government will maintain a supply of 10 million tons of cooking oil, comprising 8 million tons for the domestic market and 2 million tons for stocks or reserves. “The DMO percentage to be fulfilled by each producer will be adjusted to the calculation of the Trade Ministry. Meanwhile, price determination by the Trade Ministry will refer to the study of the Development Finance Comptroller (BPKP),” said Airlangga.

KOMPAS/HERU SRI KUMORO

Coordinating Economic Minister Airlangga Hartarto

In line with the DMO rule, the government will issue a regulation to determine the mechanism of cooking oil production and distribution to the public in an equitable and well-targeted manner. Airlangga affirmed that palm oil producers failing to carry out the DMO would be subjected to sanctions as regulated.

Separately, Trade Minister Muhammad Lutfi said his ministry was formulating new regulations on the export of CPO as well as the revocation of the export prohibition on CPO and some derivative products. One of them concerns the DMO policy and the control mechanism and its sanctions.

Later, continued Airlangga, export realization would be tightly controlled and integrated with the Directorate General of Customs and Excise, the Finance Ministry, the Food Task Force, relevant ministries and institutions, regional administrations and the Attorney General’s Office. “The government will take action against deviations in distribution and export by those not complying with the existing policy,” he said.

Sufficient supply

According to Airlangga, the demand for bulk cooking oil at home totals 194,634 tons per month. So far, the export ban has increased the supply of bulk cooking oil, which was recorded at 211,638.65 tons in April or 108.74 percent of the total monthly demand. Before the export prohibition on CPO and its derivate products on 28 April 2022, bulk cooking oil supply only totaled 64,626.52 tons in March 2022 or 33.2 percent of the monthly demand.

KOMPAS/PRIYOMBODO

Notification of empty cooking oil stocks at a retail shopping center in the Kebayoran Lama area, South Jakarta, Sunday (13/3/2022).

In the meantime, Executive Director of the Institute for Development of Economics and Finance, Tauhid Ahmad, described the policy obligating producers to supply domestic market needs as necessary. The allocation of 10 million tons of cooking oil under the DMO policy is more than sufficient to fulfill domestic demand. “The domestic allocation rule is highly possible to implement on the condition that it is strictly controlled,” he said.

He was pessimistic that this policy could be optimally applied because no party would bear the difference between the price determined in the DMO policy and the economic price.

However, Tauhid spotlighted the effectiveness of cooking oil basic material price determination at the level of producers by the government, which is also part of the DMO policy, He was pessimistic that this policy could be optimally applied because no party would bear the difference between the price determined in the DMO policy and the economic price.

In his view, if distribution is left to the market mechanism, the potential for a cooking oil price hike could not be avoided. Furthermore, the network of distribution, especially of bulk cooking oil, was not as neat as the network of distribution of packaged cooking oil.

“This price determination has no technical rule related to its application at the level of business players, so it gives rise to doubts as to whether the policy can have an impact on cooking oil price stability or not,” he added. (DIM/HEN)

(This article was translated by Aris Prawira)