Indonesian palm oil at critical juncture: To thrive or dive?

Overshadowed by tougher antimarket policies to stabilize the price of cooking oil at the government-fixed level and a weakening palm oil market, the Indonesian Palm oil Association (Gapki) will convene its national conference, held once every five years, in Bali on March 8-10.

As the representative of the upstream palm oil industry, Gapki will discuss the prospects, key issues and strategies for multistakeholder efforts to rise to the emerging challenges faced by the industry. A timely and correct response by the organization in engaging the government and other key stakeholders to address any threats will ensure palm oil can thrive sustainably.

On the contrary, failure to act or inaction against growing internal and external issues will lead to a bleak future for the palm oil industry as has happened to other failed commodities, such as coconut and rubber, which enjoyed a robust market and growth in the 1960s-1970s but went bust in the 1980s.

Despite the policy uncertainty over the past two years and escalating negative campaign by the European Union and many green NGOs, the palm oil industry has proven its resilience.

The burgeoning development of oil palm plantations to an estimated total area of more than 16.5 million hectares in 2022 and an annual production of over 50 million tonnes of oil has made the industry the second largest foreign exchange earner after coal. About two-thirds of the total output are exported in crude palm oil and its derivatives.

Yet more important to the economy is that about 40 percent of the total plantation area is owned by about 3 million smallholders, a factor that makes its role significantly important in combating poverty in rural areas.

Among the ongoing challenges facing the industry for the next decade is its persistent negative international perception, notably in the Europe Union, as one of the main drivers of deforestation, which has prompted many advanced countries to campaign against the commodity through protective trade measures. The most outstanding of the laws perceived to be protectionist trade policies in the name of mitigating climate change is the EU deforestation legislation.

Certainly, the hottest and most contentious issue during the conference will be the antimarket measures issued by the government in January in another concerted bid to stabilize the price of the simply packaged cooking oil at the government-fixed level.

The government miserably failed to learn lessons from the failure of its eight market-distortion policies issued during the peak of the commodity boom in the first half of 2022 to tame the spiraling cooking oil price.

The government seemed unaware of all the damage caused by the series of miscalculated actions, which have soured its relations with palm oil companies and sown mutual distrust between the two parties. The government still tends to blame companies for not supporting its price stabilization measures, while the main blame should be put on its utterly poor institutional capacity to implement the erratic measures.

Palm oil companies agree that government market intervention is imperative to protect consumers from the inflationary impacts of the steep price hikes for cooking oil caused by a global surge in the prices of edible oils.

Past mistakes have shown that making market policies without prior meaningful consultation with the market players and commodity producers, and without a serious assessment of the government’s institutional capacity to implement the policies, is prone to loopholes and doomed to failure.

The national conference should therefore be a good forum to work on business-friendly policy recommendations to help stabilize the cooking oil as a staple food.

The basic fact is price volatility is one of the main characteristics of the international commodity market. But as a major source of food and energy, the government should have a price stabilization mechanism at hand to cope with such volatility.

But market-distortive measures will never be effective in maintaining price stability due to the bureaucratic red tape needed to manage such antimarket measures in view of the inadequate institutional capacity of the government. For instance, the new domestic market obligation (DMO) policy will never run smoothly without a single, state institution being fully in charge of managing the logistics and distribution and acting as the price stabilizer.

Another important issue that needs to be discussed is technical details for the enforcement of Government Regulation No.26/2021 issued in April 2021 which requires oil palm companies to act as the agent of development for smallholders around their concessions, empowering the farmers with assistance and extension services under commercially viable partnerships. Such partnerships should cover at least equivalent to 20 percent of the plantation concession of companies.

The implementation of such mutually beneficial business partnerships is crucial to raise the yield of smallholder estates, which now is only about half of that of companies, and consequently increase their income, thereby reducing the need to constantly expand plantation areas at the expense of forested areas.

Even the environmental NGOs, which were formerly most critical of the industry have acknowledged that most big companies in the country have strictly implemented the principles of sustainability in their plantation management to fulfill the market demand for environmentally friendly products. But smallholders do not have the capacity or the resources to meet the sustainability standards due to a lack of knowledge and the low yield of their plantations.

Another important agenda for the conference to appease the international criticism of the industry is the slow implementation of the Indonesian Sustainable Palm Oil (ISPO), which covers the legal, social and environmental standards.

The government regulation has required all oil palm plantations to be certified under the ISPO program by 2025, but until last year only about 3.7 million ha of the 16.7 million ha total estates have been certified with sustainable palm oil.

The Gapki national conference is an opportunity to validate the relevance of the organization as the authoritative representation of Indonesian palm oil growers and a highly regarded partner for the government and other key stakeholders.

Consequently, an influential Gapki is needed to build a country-wide coalition in dealing with domestic as well as global industry issues in order to protect the industry and capitalize on development opportunities for sustaining palm oil growth in Indonesia.

Tags: Indonesian Palm Oil Association, price, GAPKI, palm oil, cooking oil, Market