In a single-minded effort to protect domestic consumers, Indonesia has earned the ire of countries around the world with a series of haphazard decisions that have roiled the global palm oil market and inevitably dented its reputation as a reliable investment destination.
The Joko Widodo government came under a similar attack earlier this year with a sudden ban on coal exports to ensure adequate feedstock for dozens of thermal power stations, which still make up half the country’s power generation.
But as the world’s largest exporter of the vital cooking oil ingredient, the latest flip-flops have had far more serious consequences, particularly with the Russia-Ukraine war adding to shortages of alternative vegetable oils.
Palm oil buyers, commodity traders and economists have all been vocal in their condemnation of the administration for its policy flip-flops, which producers blame on an “opaque supply chain” and a startling lack of careful analysis.
With his popularity taking a dive in one recent survey, it is doubtful Widodo would pay much attention to that anyway given his concern at ensuring sufficient supplies of cooking oil ahead of the post-Ramadan Lebaran holiday.
“This prohibition does have a negative impact,” he acknowledged in a nationwide address. “It may potentially reduce production and prevent farmers’ harvests from being absorbed, but this policy is to increase the abundance of domestic supply.”
Smuggling kicks in
Smuggling becomes inevitable whenever there is a differential between domestic and world prices, in this case leading to the arrest of the director-general of foreign trade and three other senior officials accused of issuing illegal export permits.
It is not clear how long the ban will last, but retail cooking oil is now selling for an average of 26,400 rupiah ($1.83) a liter, up more than 40% this year alone in a country that consumes 11 million liters a day.
Indonesia earned US$35.5 billion from 26.9 million tonnes in total palm oil exports last year, the largest markets being China (4.7 million tonnes), the European Union (4.0MT), India (3.03MT) and Pakistan (1.6MT).
Despite ongoing problems with the European Union over forest preservation that threatens future trade, producers are calling it a “golden era” for the palm oil industry with the world price rising from $780 last July to the current $1,600 a tonne.
But Indonesia itself is already seeing the impact of the ban. In trying to protect its most vulnerable citizens, it has increased the cost of imports through depreciation of the rupiah and brought higher price spikes for other household commodities.
Certainly, it has made few friends by turning an unforeseen situation into chaos because of what producers say is a lack of coordination between the trade and industry ministries in producing the analysis necessary to support policy decisions.
First, the government banned the export of palm oil products, introducing a Market Obligation (DMO) mechanism to protect local consumers in the face of rising world market prices. At the same time it lifted the DMO threshold from 20% to 30%.
Then, in mid-March it scrapped the DMO completely, replacing it with a levy system under which export taxes were linked to the basic home price of crude palm oil (CPO), set at a maximum of $675 a tonne if the world price topped $1,500.
Subsidies to be revised
The Trade Ministry also announced it would revise the types of cooking oil it would subside through the levy fund to include only bulk palm olein and exclude packaged vegetable oils.
Weeks later, the export ban was reimposed, but palace officials told the Indonesian Palm Oil Association (GAPKI) it was temporary and would only apply to bleached and deodorized (RBD) palm olein, one form of processed palm oil.
They said the raw materials for RBD palm olein – CPO and refined palm oil – would be subject to “strict supervision” and not an export ban, but officials warned the ban would be widened to include refined palm oil if there was still a domestic shortage of the ingredient.
According to data presented at a palace briefing, 65 companies exported 1.5 million tons of RBD palm olein in the first three months of the year, compared with 12.7 million tons shipped by 238 exporters for all of last year.
REDD Intelligence says for all the criticism heaped on the government, the steep price increase for cooking oil has seen arbitrage players mushroom along the entire value chain, something government policymakers are unlikely to be unaware of.
“Countries around the world have been grappling with skyrocketing commodity prices that were exacerbated by the Ukraine-Russian war,” it said, “but the abruptness of the Indonesian policy announcements caught many industry players and investors off guard.”
The decision saw prices of palm, soybean, rapeseed and sunflower oil rocket to historic highs at a time when drought in South America and Canada has severely affected soybean and canola oil production.
About a quarter of Indonesia’s 49 million hectares of agricultural land is now given over to palm oil, dragging an estimated 10 million people out of poverty over the past two decades, a significantly higher expansion rate than in regions where it is not grown.
But for environmentalists, the sharp rise in production from 8.3 million tonnes in 2001 to 42.6 million tonnes harvested in 2021 has come at a high cost of lost rainforest and seriously-damaged peatland across vast areas of Sumatra and Kalimantan.
The acceleration in production was in response to the increased demand for biofuel, which brought extra pressure to bear on the environment and now, it appears, to the world’s food supply.
About seven million tonnes of Indonesia’s total production has been given over to biofuel, or so-called “green diesel,” drawing the ire of the European Union, which refuses to classify it as a renewable energy. As one Indonesian producer notes: “They’ve tripped over themselves. If it wasn’t for biofuel, what we have would be adequate.”