The Fate of Indonesian Crude Palm Oil in the Global Market

Indonesia might be proud that its crude palm oil (CPO) exports are the highest in the world. Even so, the national oil industry still faces a steep path in the global market.

Since 2006, Indonesia has overtaken Malaysia as the number one palm oil producer in the world, and CPO productivity has continued to increase from year to year. Indonesia produced 23.5 million tons of CPO in 2012, and is estimated to increase to 25 million tons in 2013. So is the export value. CPO became the backbone of Indonesia’s non-oil exports, which recorded a figure of more than US$ 20 billion each year in the trade balance. The advantage in terms of nutrition and cheaper production makes CPO demand higher than other vegetable oils, such as soybean and sunflower.

Along with the increasing national CPO business achievement, there are still challenges in the form of trade competition. The first example is Pakistan, which taxed CPO from Indonesia in amount of US$ 14 per tonne. As the cost was more than the cost imposed on palm oil from Malaysia, the World Trade Organization (WTO) intervened. This issue was solved in 2011 when the tax for Indonesian CPO declined. As a result, Indonesia’s CPO export to Pakistan fell to 35%. The second example is the French accusation that Indonesian palm oil is harmful to health. In response, Minister of Agriculture Suswono issued a protest against the European country. However, the Frenchallegation has not been comparable to the effect of negative campaigns executed by myriad environmental NGOs (ENGOs), which state that Indonesian palm oil is a major cause of deforestation.

Economically, the charge does not affect the value of the production and export of Indonesian CPO. But, the bad stigma makes global companies doubt the quality of Indonesian CPO. Nestle and Unilever, for example, stopped buying CPO from Indonesia as a result of the ENGO campaigns. As the climax, Indonesian CPO has not made ​​it into the Environmental Goods List (EG List) belonging to APEC. The ENGOs clearly stated that their actions were purely environmental campaigns and not “sponsor orders.” Palm oil farmers and companies still see their action as a black campaign that intends to drop Indonesian palm oil industry.

Member of the House of Representatives Commission IV, Firman Subagyo, and researcher for Center for Strategic and International Studies (CSIS), J Kristiadi, even considered the ENGOs’ action as an intervention of government policy and state sovereignty. Likewise, the Roundtable on Sustainable Palm Oil (RSPO) felt the same. Economic expert Dradjad Wibowo said that the RSPO, which is supposed to be a mediator between the interests of producers and consumers of CPO, could potentiallybecome a tool of colonialism from developed countries as it is dictated by foreign NGOs .

Other challenges also arise from the internal side such as government fiscal policy. Domestically, the CPO export duty rate is subject to change every month. The government is currently implementing export taxes and an export benchmark price of CPO and its derivative products progressively. It refers to the CPO price in the international commodity exchange in the Netherlands, as stipulated in Ministerial Regulation No. 67/2010 on the Establishment of Export Goods Subject to Export Duty and Tariff.

Indonesia reduced taxes on palm oil shipments abroad in 2013 with the goal of increasing sales after the price fell to its lowest level in the last three years. In November 2013, the tax was cut to 9% from the September level of 10.5%. The government then raised it to 12% in December 2013, the highest percentage since October 2012 when it was13.5% . Dynamic export tax is a government solution to overcome the ups and downs of the price of CPO,  which raises concerns that will affect the level of production and demand.

In addition, regulation PMK No.78/2010 on crediting mechanisms of input value added tax (VAT) would lead to multiple interpretations for the Tax Directorate to bold the correction and interpretation that has long produced all the fresh fruit bunches (tandan buah segar-TBS), the input VAT should not be credited. In fact, TBS is categorized in semi-finished goods for the palm oil industry that needs to be processed again into CPO and can not be stored for long periods. However, the interpretation of the tax office that submission is not necessary as long as it produces TBS, then the input VAT could not be creditable, it results in double taxation. In addition to double taxation, CPO industry today imposed a 15%  export duty. It drives the palm industry should pay triple taxation of which accounts for 65% -75 % of total profits.

Until now all the challenges above do not affect much to the productivity of Indonesian CPO. But, it does not mean the government can sit back and realx. Competition in thepalm oil industry at the global level is fierce. Indonesia at this time is able to beat Malaysia. Yet Indonesia should be wary of Malaysian Government movements considering the palm oil industry is one of the pillars for their economy and that the country as the second largest palm oil producer in the world. The Malaysian Government is actively promoting and opening foreign markets through the Malaysian Palm Oil Council (MPOC), which exists in the various countries of export destination and financially supportsthe negative campaign against palm oil. Malaysia’s breakthrough has been fiscal. which is revised into a progressive CPO export tax of 4.5% when the CPO price reached MYR2.250 to MYR2.400 permetrik tons (MT), up to a maximum of 8.8% for crude palm oil prices in the range of MYR3.450 until MYR3 .600 per MT. As of September 2012, Malaysia’s palm oil exports reached 1.5 million MTand  rose 4.9% from August 2012 to reach 1.43 million tons. So far, Malaysia imposed import duty and export shipments by 23% flat for any price.

But this is not only Malaysia. At the global level business competition, Indonesia should read the movements of Brazil and Africa. Currently Brazil optimizes land resources forpalm oil  plantations. Africa itself is beginning to manage its  CPO industry by holding the first congress devoted to oil palm plantations in Africa in mid-2013. At this tim it is only Gabon that is managing its oil palm plantations seriously. The area planted with oil estimated to be about 7,500 acres for the production of 45.760 tonnes of palm bunches and 6.100 tons of crude oil. By the end of 2014, it is expected to reach 25.000 hectares.

For Gabon and neighboring countries in Africa, palm production is a priority. Palm oil is the most consumed oil in the world. It’s 53 million tonnes in 2012, and the world will consume at least 77 million tons per year in 2050. The African region is known to only represent 4.4% of world palm oil production. In the long term, African countries want to meet domestic demand, which will require more than one million hectares.

It’s certainly more difficult for Indonesia to influence policies that inhibit trade in CPO imposed by importing countries, managing the growing demands of the oil industry sustainable following black campaigns, as well as the emergence of new competitors in the oil palm industry. They are all external challenges.

For the long term, if the Indonesian Government is only doing the usual thing with regard to the national palm oil industry, it is likely to weaken Indonesia’s competitiveness in the global market. Tax revenues have a good impact only for state revenues, not to the sustainability of the national palm oil industry. The success of Indonesia as the largest palm oil producer in the world today must be recognized not only because of climatological factors, technical agronomic, and land suitability. But also, mainly, due to government policies that support the development of the palm oil industry both policies related to aspects of the production, financing, infrastructure support, and a good cross-sectoral cooperation.

by Difa Kusumadewi, Ika Virginiaputri, and Rina Hutajulu

About Rina Hutajulu 17 Articles
Rina Hutajulu is an independent journalist for the Dekker Centre focusing on political studies of civil society movements and environmental issues in Indonesia. She writes for various on line media and print media as well. Rina is based in Jakarta.

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