Palm Oil Business Arrangement
The government has made positive steps by reopening the tap to palm oil exports. It also carried out an investigation into the perpetrators suspected of violating the law in managing the complex palm oil business.
The government has decided to lift the export ban on crude palm oil (CPO) and derivative products. This policy is effective from 23 May 2022.
This move should, of course, be welcomed. However, it must be viewed as a first step in rearranging or restructuring the future of business in the palm oil industry.
There are several reasons why restructuring is necessary. First, the palm oil industry has a long supply chain and complex management from a social, political and economic perspective. This industry is an example par excellence of the link between the agriculture and industrial sectors with diverse interests.
This starts from the stage of planting oil palm plantations to produce fresh fruit bunches (FFB). Palm oil mills either purchase FFB from middlemen or harvest them from its own plantations to process into CPO and palm kernel oil (PKO). Export sales starts after production is complete. However, if the CPO is not exported, it can be processed further at a refinery into derivative products for daily needs, such as cooking oil and margarine.
Second, unfortunately this link also illustrates differences in the concentration of assets and capital, which are quite striking. In terms of land ownership, the Agriculture Ministry and Statistics Indonesia (BPS) estimate that, as of 2021, community-owned oil palm plantations totals 6.1 million hectares, while 8.4 million hectares of oil palm plantations are managed by 2,892 private companies.
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On the industrial side, 38 companies operate palm oil mills while 74 companies operate cooking oil refineries. Oil palm plantations have a sizeable political base. As of 2019, at least 2.5 million farmers and 4.3 million workers worked on plantations from rural areas to the coast, especially on the islands of Sumatra and Kalimantan.
Third, the distribution of palm oil derivative products, such as cooking oil, relies heavily on the role of wholesale distributors to households for consumption.
The results of a BPS survey in 2020 show that 56.28 percent of cooking oil production is channelled to distributors and 40.28 percent is sent directly for exporting. It doesn't stop there: the distribution of cooking oil still must pass through retail traders, which are the biggest suppliers to meet the needs of household consumers.
The survey also found that retail traders have the largest trade and transportation margin (MPP) in the entire process of distributing cooking oil, which was 10.07 percent in 2020. This figure is an increase from the 6.88 percent MPP for retail traders in 2018.
Fourth, the industry of CPO and derivative products play an important role in Indonesia's macroeconomic stability. A 2021 study conducted by Kiko Hirada and the International Monetary Fund (IMF) shows that in 2019 alone, the estimated share of palm oil exports was 10 percent of all exports from Indonesia, the world's largest producer of palm oil that contributes around 55 percent of global palm oil production.
Commercial loans for oil palm plantations are estimated at around 3.3 percent. Therefore, disruption to the stability of palm oil exports can cause serious disruptions to the stability of Indonesia’s current account and financial sector. Chain Reaction Research estimated in 2018 that bank loans to the palm oil sector reached US$11.4 billion.
Government intervention
The complexity of the palm oil business, which has a very large capital turnover, seems also to involve large government intervention from the upstream to the downstream.
In the upstream, for example, the government has intervened through Agriculture Ministerial Regulation No. 98/2013, which stipulates that ownership of oil palm plantations with at least 20 percent of the total raw material needs to obtain a plantation business permit for processing (IUP-P). Meanwhile, the same regulation also stipulates that the minimum processing capacity to obtain an IUP-P is 5 tons of FFB per hour.
This intervention actually creates a large barrier for smallholder oil palm farmers to enter the industry. Smallholder plantations that have limited land will find it difficult to produce derivative products with higher added value. Therefore, FFB produced at private farms are highly dependent on collectors or middlemen to sell their products.
Government intervention is also found in biodiesel processing. According to the provisions of Energy and Mineral Resources Ministerial Regulation No. 12/2015, the palm oil industry is required to support the government's B20 and B30 biofuel programs to reduce the burden of diesel fuel imports.
The discrepancy between the price of CPO in the international market and the biodiesel price is covered by funds from the Palm Oil Plantation Fund Management Agency (BPDPKS), which was established in 2015. Borrowing Allen and Radev's concept from the IMF, the BPDPKS fund can be categorized as extra-budgetary funds, or outside the State Budget (APBN), and is therefore vulnerable to transparency in its use.
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Other interventions in the downstream sector are in the forms of domestic market obligation (DMO) and domestic price obligation (DPO) for CPO during the soaring prices of cooking oil early this year, when global CPO prices increased sharply as an impact of the Covid-19 pandemic, followed by the war in Ukraine. In responding to the dynamics of the global market, which was shaken by the impacts of the pandemic and the Russia-Ukraine war, the government made policy interventions that sometimes changed constantly (policy flip-flop).
The first intervention was initiated by Trade Ministerial Regulation (Permendag) No. 1/2022 issued on 11 Jan. 2022. The trick is to maximize the BPDPKS fund.
The Permendag also stipulated a maximum retail price (HET) of Rp 14,000 per liter for cooking oil in simple packaging. However, the effectiveness of this policy is difficult to assess.
Not long ago on 19 Jan. 2022, a cooking oil subsidy policy was issued with an HET of Rp 14,000 per liter for all packaged cooking oils. The distribution of subsidized cooking oil aimed to reach 250 million liters per month during this six-month period. Again, the funding budget came from the BPDPKS, reaching up to Rp 3.6 trillion.
The prices did not go down, which prompted the government to revise its policy again.
However, the target was not achieved and soon, cooking oils began to disappear from the market. The HET policy was just one week old at the time. The prices did not go down, which prompted the government to revise its policy again.
Trade Ministerial Regulation No. 6/2022 was issued on 27 Jan. to regulate the HET for all palm oil-based cooking oils, from bulk to premium packaging cooking oil. This policy took effect on 1 Feb. 2022 and since then, cooking oil has disappeared from the earth. Consumers find it difficult to find cooking oil at both modern and traditional markets.
The government continued the cooking oil policy flip-flop. Pressure from the public ahead of the fasting month of Ramadan also contributed to strong political pressure. Policy harmonization continued on 15 Feb. 2022 through Trade Ministerial Decree No. 129/2022, which regulated a DPO policy of Rp 9,300 per kilogram for CPO and Rp 10,300 per kilogram for refined, bleached and deodorized palm olein, as well as DMO of a maximum 20 percent of export volume.
This policy was then revised one month later by increasing the maximum DMO to 30 percent. This amended policy, which was published on 10 March 2022, was aimed at producers to set aside their egos to save the domestic market.
As before, the policy was only temporary and ended on 17 March 2022. Instead, export levies and export duties rose 80 percent to $675 per ton for CPO commodities. The aim was to put the domestic market on an equal footing with the international market in terms of price.
To regulate the production and distribution of cooking oils, the government then maximized the role of micro, small and medium enterprises (MSMEs) by issuing Industry Ministerial Regulation No. 8/2022.
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In this case, the BPDPKS played a role in providing financing for bulk cooking oil to MSME actors. The amount of this fund was equal to the discrepancy between the economic reference price (HAK) and the HET.
Of course, this aimed to speed up a decline in cooking oil prices. Not seeing a bright spot, the government then implemented an extreme policy by placing a ban on all CPO exports under Trade Ministerial Regulation No. 22/2022. However, this policy caused FFB prices to drop drastically at the farm gate.
Future policy agenda
The government has made positive steps by reopening the tap to palm oil exports. It also carried out an investigation into the perpetrators suspected of violating the law in managing the complex palm oil business.
However, this effort needs to be complemented by the following three policy agendas. First is the rebalancing policy agenda. This agenda is mainly directed at reducing the gap in both land ownership and the concentration of capital in palm oil companies.
New regulations also need to be made to balance the interests of big businesses and small and medium enterprises and cooperatives in the palm oil sector.
Second is the transparency policy agenda. It must be ensured that intervention through various regulations does not become a "business commodity" with a rent-seeking nuance, of course including the use of the BPDPKS’ extra-budgetary funds. This is necessary to narrow the potential for irregularities in the fund’s use.
Third, is the policy agenda for involving all stakeholders, especially those representing oil palm smallholders, in drafting the pricing and DMO policies. This is to build a more strongly rooted sense of policy ownership when the government makes policies in response to global market turmoil.
Makmur Keliat, Lecturer of international political economy at Faculty of Social and Political Sciences (FISIP), University of Indonesia; senior analyst at LAB 45
This article was translated to Kurniawan Siswo.
