Coconut Oil

The Ban On Palm Oil Export Backfire For Indonesia?

Indonesia, which is the world’s largest producer of palm oil, announced in early April that it had imposed Indonesia palm oil export tires. This ban is the aftermath of the domestic cooking oil crisis (in which coconut oil becomes one of the viable alternative choice).

This cooking oil is widely used for cooking and is mostly made from palm oil, which is Indonesia’s main export commodity. Since the end of last year the price has been soaring and going on continuously.

This increase in prices has led to a shortage of cooking oil, from stalls to store shelves starting earlier this year. Although in few weeks at the end of the of Ramadan conditions is improving, but prices are still expensive. The price of a liter cooking oil can be doubled and this triggers inflationary concerns.

Reasons for Ban on Palm Oil Exports

The ban on palm oil exports implemented by the government is expected to reduce the increase in food prices and quell the domestic situation. However, the impact of this implementation could turn the country’s economy upside down, while global prices were forced even higher.

Rising vegetable oil prices were further exacerbated by Russia’s invasion of Ukraine, considering that the two countries combined control about 80 percent of the world’s oil market. However, more than a third of the total share of global exports, Indonesia dominates the world’s production of vegetable fats and oils.

This commodity is Indonesia’s main export producer, which could earn up to $20 billion by 2020 from their customers, such as China, Pakistan and India. Palm oil, which has few substitutes, is the largest producer in the category with Indonesia accounting for around 60 percent of global production. In second place in Malaysia with 25 percent global market share.

After the ban was announced, the value of the Indonesian rupiah fell to an eight-month low, as export earnings declined. The policies adopted by President Joko Widodo were aimed at protecting the most vulnerable of Indonesia citizens, but inadvertently increased the cost of imports through the depression of his currency and created high price spikes.

Boosting Food Prices

For the global economy, the ban has further pushed up food prices, which were already at historical highs. According to the Food and Agriculture Organization of the United Nations (FAO), the costs of goods increased 12.6 percent from February to March 2021.

The packaged goods that experienced an increase in average contained palm oil, such as toothpaste and detergent. This year, the price of crude palm oil increased by 42 percent from the previously staggering 28.2 percent in 2021, as a labor shortage in Malaysia is putting pressure on production.

Previously in February 2022, the Indonesian government imposed restrictions on exports of crude palm oil (CPO) and its derivatives in the form of export approvals (PE) to overcome the scarcity of cooking oil in the country. One of the requirements to obtain PE is the fulfillment of Domestic Market Obligations (DMO) and Domestic Price Bonds (DPO).

DMO and DPO can be obtained by requiring exporters of all types of CPO to supply CPO or Refined, Bleached and Deodorized (RBD) Palm Olein domestically. Exporters are required to sell 30 percent of their planned exports to the domestic market but at a predetermined price of IDR 9,300 per kg for CPO and IDR 10,300 per kg for RBD Palm Olein.

The export restriction was implemented seven days after the Regulation of the Minister of Trade Number 8 of 2022 was issued on February 1, 2022. This policy changes the Regulation of the Minister of Trade Number 19 of 2021 concerning Export Policy (Permendag 19).

However, in practice these export restrictions were not effective and the government quickly decided to abolish them. As a replacement, the government issued Permendag No. 12 of 2022 which takes effect on March 20, 2022.

Then through a Ministry of Finance (Kemenkeu) regulation, the Indonesian government has increased the CPO export levy and its derivatives to prevent companies from exporting this product.

Trade Barriers

India has raised concerns about “trade barriers” caused in part by the ban on palm oil at the World Trade Organization (WTO). In late April, the aftermath of the ban left 300,000 tonnes of palm oil destined for India trapped in Indonesia.

Meanwhile in Pakistan, there are concerns that the country’s oil stocks could run out in May, prompting the Pakistan Vanaspati Producers Association (PVMA) to ask the Ministry of Industry and Trade to follow up on this issue .

For information, Pakistan imports 80 percent of its palm oil from Indonesia and 20 percent from Malaysia.

In general, the impact of the ban on palm oil exports in Indonesia has begun to be seen from the increase in global crude palm oil prices. In addition, the diplomatic implications of the ban depend on how long the policy lasts.

Based on his perspective, this policy is about domestic political and economic considerations. In the strategic calculus of countries, sometimes it is worthwhile to shake up global markets and disappoint trading partners in the short term in order to achieve domestic goals.

According to the Indonesian Palm Oil Association (GAPKI), Indonesia exported 34 million tons of palm oil products in 2020 . From these exports, Indonesia was able to generate revenues of more than $15 billion or around Rp. 200 trillion.

Domestic Cooking Oil Supply

Even tough the ban was able to increase the supply of cooking oil in the country, until now consumers are still complaining about cooking oil which is still sold at a price of more than Rp. 14,000 per liter in the markets.

Meanwhile, in supermarkets, the stock of cooking oil has begun to be widely available after Eid al-Fitr . However, the price, which is still considered expensive, makes consumers prefer to buy small sizes or bulk cooking oil. In fact, during Ramadan, consumers have to scramble to get cooking oil, which requires retailers to set a quota of two liters per consumer. Some shops even have to ask shoppers to dip their finger in ink, like during an election.

On the other hand, scarcity and price increases often occur before the month of Ramadan until Eid al-Fitr. However, the scarcity of domestic cooking oil surprised consumers to the point that creating a commotion in all regions in Indonesia that forced the government to set one price.

After Eid al-Fitr, people expect cooking oil prices to return to normal. Unfortunately, the government was unable to control prices with the policy of banning palm oil exports.

Then from the sales side, price control makes producers want to reduce cooking oil. Meanwhile, from the supply side, it encourages consumers to stockpile and this results in price inflation. While the impact of RBD coconut oil on the ban the export of cooking oil raw materials did not change anything, both in terms of price and supply.

Noted that since Indonesia limited palm oil exports until the end of January 2022, the Ministry of Trade had issued permits to export 2.77 million tons.

Then in order to optimize the availability of cooking oil for the basic needs of all Indonesian citizen, the government issued a decree in the form of Regulation of the Minister of Trade Number 22 Year 22 regarding the Temporary Ban on Exports of Crude Palm Oil, RBD Palm Oil, RBD Palm Olein, and Used Cooking Oil .

There are several provisions regulated in it, namely:

  • Ministerial Regulation comes into force on 28 April 2022
  • The temporary export ban also applies to expenditures from KPBPB for the purpose of leaving the customs area

This regulation further expands restrictions on palm oil exports to all palm oil derivative products. Previously, the government only banned exports of crude palm oil or CPO.

Impact of Ban Exports

Until now, the government has not reopened the export faucet for all types of cooking oil raw materials. Of course there are negative impacts felt from the ban, not only for business actors but also for oil palm farmers in Indonesia.

Close up of fresh oil palm fruits, selective focus.

Instead of being a strategy in controlling domestic cooking oil prices, the real impact of this export ban policy is the decline in the price of FFB (fresh fruit bunches) for oil palm farmers. The excess supply of palm oil which has been absorbed in the export market cannot be absorbed in the domestic market, thus making FFB prices depressed.

According to GAPKI, a number of factories are likely to last only two months because the CPO storage tanks are starting to fill up. As a result, it will be difficult for palm oil mills to receive FFB from smallholders. The limited capacity of the CPO tank made the price of FFB at the farmer level drop by 70 percent.

Based on the records of the Indonesian Palm Oil Farmers Association (Apkasindo), the price of FFB in the field which can be absorbed by palm oil companies is Rp. 1,700 per kilogram (Kg). This figure is 56.41 percent lower than the price set by the Plantation Service, which is Rp. 3,900 per kg.

Not only that, Indonesia’s macro performance is also threatened due to the decline in foreign exchange exports, so that it can be a factor that suppresses the exchange rate of the rupiah against the US dollar.

In 2021, palm oil export will be able to contribute foreign exchange to reach $35 billion (Rp 500 trillion) and become the largest contributor to export foreign exchange. In addition, export RBD palm oil also contribute to the state treasury in the form of export taxes (export duties) and income from export levies.

If the price of CPO in the international market becomes very high, while in the domestic market it is low due to excess supply, it can trigger smuggling. Of course this will make the dynamics of the national palm oil industry more complicated.

Besides that, according to commodity expert Petro Paganini from John Cabot University Rome Italy, said that amid the global shortage of vegetable oil due to the wars between Russia and Ukraine, the world has no other choice but to look for palm oil .

Due to the global shortage of vegetable oil, various food companies in European countries have even started to use palm oil as their raw material . Even a number of food products in Europe have also removed the ” palm oil free ” label.

It is undeniable that the world needs palm oil. Moreover, if the world pays attention to sustainability issues, then the choice is to develop palm oil because oil palm plantations are much more productive than vegetable oil crops.

For the Interest of Society

The decision Indonesia palm oil export tires taken by the President is the result of considerations concerning the interests of the Indonesian citizen. The President is also committed that the Indonesian citizen are the main priority of all policies issued by the government.

This policy is to ensure that all production can be dedicated to the availability of bulk cooking oil at a price according to the provisions, namely Rp. 14,000 per liter, especially in traditional markets and for the needs of MSME entrepreneurs.

However, on May 23, 2022, President Jokowi finally lifted the ban on the export of CPO and its derivatives. This certainly makes entrepreneurs happy who can re-export palm oil products at higher prices. Meanwhile, for domestic needs, the government has re-established the old DMO and DPO policies.

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