Indonesia’s farmers need protection from plummeting palm oil prices

What’s cooking in 2022? In Indonesia, not oil. The world’s largest palm oil producer is currently experiencing a cooking oil shortage. When cooking oil prices skyrocketed in late 2021, officials and experts blamed rising global vegetable oil prices and hoarders for spiking the price, leading to the imposition of a month-long export ban.

But this was not new — domestic palm oil has been scarce multiple times in the past. In 1998, the government banned exports following economic and political turmoil after cooking oil prices soared but lifted the ban after protests, lower national income and increased smuggling.

This time, the government cited the impact on 17 million labourers in the palm oil industry as one of the reasons for lifting the ban. But the government seems to overlook farmers who were in dire straits while the ban was in effect. The Indonesian Farmers Union reported plummeting prices for oil palm fresh fruit bunches, causing farmers to sell below production costs at a loss. Some farmers were unable to sell their harvests entirely. Fresh fruit bunches prices remained low after the government lifted the ban. On top of this, farmers also faced fluctuating fertiliser prices.

To better protect farmers, we must first understand the palm oil landscape in Indonesia. Hundreds of smaller corporate groups and individual companies dominate plantations and mills — the upstream sector — while several large Indonesian groups dominate more than half of the downstream sector, including refinery and export.

Smallholders struggle to take a greater part in the supply chain as they need capital for refineries. Currently, smallholder farmers produce fresh fruit bunches and sell them to mills through local agents, brokers, cooperatives or directly to mill companies, who refine fresh fruit bunches into crude palm oil and other products.

In theory, current provisions require factories to buy fresh fruit bunches from farmers’ organisations under regulated prices, with companies potentially losing their business permit if they violate the law. But in reality, anecdotal evidence shows corporations and intermediaries have been buying fresh fruit bunches from farmers below the stipulated price, as farmers lack bargaining power on market options and prices. Such price discrepancies have also happened during 2022’s export ban.

Indonesia should end the export ban, considering its impact on farmers. Ideally, the government should promote market forces, which would raise prices for farmers.

If there is concern that soaring prices may hurt low-income households, the government could give direct cash transfers to the poor. In March 2021, 40 per cent of the poorest households consumed about 3.44 litres of cooking oil per month, at a price of around Rp 11,000 per litre. If cooking oil prices rise to Rp 20,000 per litre, the government could transfer around Rp 31,000 per month to vulnerable households so that their purchasing power for cooking oil remains the same.

But promoting a free-market economy is unlikely to gain political and public support due to the possibility of soaring cooking oil prices. The country could opt for an export tax instead, although a previous study warns against its drawbacks on farmers’ income.

Governors must also strengthen supply chain regulation and monitoring by enforcing current reporting mechanisms as listed in the Agriculture Ministry Regulation so that palm oil companies buy fresh fruit bunches directly from farmers at regulated prices. Indonesia should also provide a dedicated channel through which farmers can easily access market information on prices and report any discrepancies between regulated and on-the-ground prices.

With more farmers being registered as suppliers, companies can easily trace their supplies while farmers can receive better prices, incentives and training programs from the government and companies. Complete data on farmers would also allow the government to allocate excess funds from the Oil Palm Plantation Support Fund Management Agency to support farmers, such as by providing low-price fertilisers. With this help, farmers could maintain production and support the stability of palm oil supply in Indonesia.

As more supply shocks loom in the future, the government should aim to increase productivity and improve the post-harvest phase of the supply chain to increase production volume and revenue for farmers. In the long term, such a move will amplify Indonesia’s production competitiveness and mitigate another price spike in the future.

Tags: palm oil, ban, cooking oil, shortage, producer, Plantations, fresh fruit, export, Indonesia, prices, Vegetable Oil