The Current State of Palm Oil Agroindustry in Indonesia. Mohamad Fadhil Hasan Indonesian Palm Oil Associa4on

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1 The Current State of Palm Oil Agroindustry in Indonesia Mohamad Fadhil Hasan Indonesian Palm Oil Associa4on

2 Palm Oil Development: A Success Story Ø Oil palm has been one of the most dynamic of Indonesia s agriculture sub- sectors. Ø Factor endowments; land suitability and availability, favourable climate, and low labor cost. Ø Government policy encouraging oil palm planta4ons; provision of subsidized credit, fer4lizer and other inputs for private and government estates. Ø Development of Nucleus- Estate Program (NES) for smallholder partly funded by World Bank Ø Effec4ve implementa4on of government policies and higher returns compared to other crops

3 Palm oil industry contribution Ø Employment opportunity; 4 millions farmers and workers. Ø Poverty allevia4on; district with increases in palm oil produc4on saw significant poverty reduc4on. A 1 percent increase in palm oil produc4on contribute to a reduc4on of poverty between percentage points. Ø Economic equity improvement; narrowing the gap between rural and urban, and Java and outer island of Java. Ø Export revenue;s US $ 20 billions in 2014 (the largest non oil and gas export earnings). Ø Palm oil has strong mul4plier effects and linkages to other sector in the economy.

4 Oil Palm Area Planted (Ha) Smallholder Government Private

5 CPO (million tonnes) 20,00 18,00 16,00 14,00 12,00 10,00 8,00 6,00 4,00 2,00-17,84 12,74 12,97 12,10 10,81 9,15 7,77 8,29 7,77 7,88 6,57 7,02 6,28 5,42 3,91 4,44 2,04 2,20 2,29 2,15 1,85 2,04 2,08 1, Smallholder Government Private

6 Share of the Area Planted by the Types of growers (%) Year Area Planted (ha) Smallholder Government Private Total

7 Share of Palm Oil by Types of Growers (%) Year (metric tons) Smallholder Government Private Total

8 Indonesian yields and revenues per hectare from alternative crops, 2014 Source: LMC Interna4onal, August 2015

9 Profitability of oil palm and the competing crops (US$/ hectare) 2014 Source: LMC Interna4onal, August 2015

10 Table 2. Production Cost for Indonesian CPO (US$ per Metric Ton)**** 1. Upkeep Processing Overhead cost Total 1996* 2002** 2009*** *)Manurung **)Barlow et. al ***) Mukti (calculated) Do not include land cost, interest rate, and forwarding cost from mill to port

11 Costs and profitabilities v There is an increasing trend in cost of produc4on due the increase in labor cost, availability of land, interest rates, cost of land permits and lack of infrastructure. v The need to improve produc4vity especially for smallholders through beder access in technology, market and credit; formaliza4on and land cer4fica4on; strengthening extension services; empowerment of farmers organiza4on. v The need for more simple land permit procedures, improvement in infrastructures, adjustment in labor law, elimina4ng high cost economy and addressing environmental issues

12 Continue declines of CPO prices In the last two or three years price of CPO shows declining trends, and even in the last six months price of CPO drop significantly. In 2014 the average prices of CPO was around US $ 844 per ton and in 2015 (January- June) the average price was only US $ 669 per ton (cif Roterdam). The reason for this is due to weak demand in the main impor4ng countries and declines in crude oil price that has close associa4on with palm oil price. In addi4on, there is narrowing gap in prices of soybean oil and palm oil indica4ng deteriora4on of palm oil compe44veness.

13 Development of CPO prices cif RoW., Crude (USD per MT ) 1.175, , , , , , , , , , , , , , , , , , , , ,17 857, ,77 812,5 847,95 857,13 847,62 840,92 861,3 843,3 834,52 836,85 831,5 907,14 916,14 877,65 875, ,95 908,88 865,98 858,1 798,81 707,93 715,25 725,34 686,59 692,22 663,39 670,38 655,66 654,17 661,59 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul*

14 Palm Oil Export and Prices 2.500, , , , , , , , , ,00 800,00 661,59 600,00 400,00 500,00 200,00 0,00 0,00 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul* Total Palm Oil Export (in 1000 Ton) cif Rod., Crude (USD per MT )

15 Factors affecting the decline in palm oil prices Weak demand in the main impor4ng countries especially China and India. Declining prices of crude oil that has close associa4on with palm oil. Good of harvest of other vegetable oils such as soybean and rapeseed. Narrowing gap in prices of soybean oil and palm oil indica4ng deteriora4on of palm oil compe44veness. Toothless mandatory biofuel program in Indonesia and Malaysia.

16 Oversupply of CPO In the mean4me supply of CPO especially from Indonesia con4nue to increase considerably. In 2015 produc4on is es4mated at 32.5 million tonnes increase from 31 million tonnes in the previous year. Malaysia s produc4on also increase from 19.6 million tonnes in 2014 to 20.1 in Not only palm oil which experiences an increase in produc4on, other vegetables also recorded highest increase in produc4on. These include soybean, rapeseed, and sunflower.

17 Global oils & fats supply and demand scenario Global Oils & Fats Supply & Demand Scenario ('000 T) E 2015F Opening Stock 19,780 21,317 23,019 24,795 28,405 27,452 28,082 Production 164, , , , , , ,458 Import 63,592 66,007 66,856 71,929 73,966 75,400 78,459 Export 64,166 66,545 68,315 72,295 75,419 75,600 78,763 Consumption 162, , , , , , ,893 Ending Stock 21,317 23,019 24,795 28,405 27,452 28,082 28,343 Stock Usage Ratio (%)

18 Indonesian palm oil supply and balance Indonesian Palm Oil Supply and Demand Balance ('000 T) E 2015F Opening Stock 1,630 2,180 3,150 3,900 3,109 3,562 Production 22,300 24,300 26,800 27,600 30,406 31,253 Import Export 16,450 17,070 19,094 20,800 20,865 21,130 Consumption 5,379 6,309 6,980 7,640 9,168 10,131 Ending Stock 2,180 3,150 3,900 3,109 3,562 3,606 Stock Usage Ratio (%)

19 Malaysian palm oil supply and demand balance Malaysian Palm Oil Supply and Demand Balance ('000 T) E 2015F Opening Stock 2,238 1,614 2,056 2,628 1,987 2,013 Production 16,993 18,912 18,785 19,216 19,667 20,090 Import 1,110 1,306 1, Export 16,644 17,991 17,575 18,122 17,278 17,800 Consumption 2,083 1,785 2,062 2,291 2,850 2,900 Ending Stock 1,614 2,056 2,628 1,987 2,013 1,953 Stock Usage Ratio (%)

20 Weak demand for CPO from the main importing countries The three largest impor4ng countries: China, India, and EU. The growth of export of CPO slow down in recent years due to declining in economic growth, and industrial output. Meanwhile, increase in export to other countries cannot fully compensate the declining growth to the main impor4ng countries.

21 Supporting mandatory program on biodiesel Since 2006 Indonesia implements mandatory program on biodiesel star4ng from B5 and con4nue to increase to B10 in There are many cri4ques that this program is not effec4ve and toothless as no penalty imposed on the oil companies who do not blend its diesel. In 2015 government issued new regula4on to increase mandatory program on biodiesel to B15. With this B15, around 2.5 million tonnes of CPO are needed in PSO program and if non- PSO program included another 2.5 million tonnes of CPO are needed. However, the government fail to allocate subsidy for this program in their budget so that Pertamina as sole buyer of this subsidize biodiesel. Thus, government asks the industry to provide subsidy for mandatory biodiesel program. It is expected that this subsidy will make the mandatory program on biodiesel beder and more effec4ve.

22 Accelerating replanting, sustainability, promotion, R&D program and improving infrastructure Indonesian palm oil industry faces problems related to infrastructures, inadequate R&D and promo4on, slow replan4ng program, and sustainability problems. One of the causes of these because of the lack of fund needed to carry out these program. It is expected that some of the fund collected from the levy will be allocated to these various program so that it make industry more efficient and compe44ve.

23 The Impacts: who gain, who lose Up stream industries, farmers: the up- stream industry (planters) and the farmers are clearly the looser. Exporter will transmit the levy to the farmer and pure planter and the burden will be distributed along the supply chain. We es4mate that price of FFB (Fresg Fruit Bunch) will driop considerably by 20%- 30%. Integrated planters: this export levy will have neutral effect for the integrated planters. On one hand they suffer from the levy of CPO but it will have incen4ve to produce more downstream products. Downstream industries: this industry enjoy benefits from the levy as they earn a wider processing margin due to the tax differen4al between CPO and processed palm oil products. Other countries exporters: This is another player who get benefits from the levy since they are now more compe44ve compared with their Indonesian counterpart.

24 The Impacts: short term and long term Short term: in the short term, this levy will make Indonesian palm oil industry is less compe44ve compared with other producing countries as they have to bear the addi4onal costs of the levy. In addi4on, local price of CPO could decline and trade at as much as US $ 50 per tonne below interna4onal CPO price. Long term: in the long term, this levy is expected to boost interna4onal price of CPO as more CPO of about 5.5 million tonnes will be used in domes4c markets for biodiesel. However, this requires that the mandatory program of biodiesel could be implemented effec4vely. The study shows that a boost of one million tonnes to local biodiesel demand in Indonesia would raise the CPO export price by $96 per tonne. Thus, enforcement of the mandatory biodiesel program is the key in determining the likely impact of the export levy on palm oil industry.

25 Conclusions Indonesia con4nues to be one of the most compe44ve countries in producing palm oil and palm oil is also considered to be one of the most profitable crops in Indonesia. Produc4on and export of palm oil con4nue to grow but at lower rates especially in the recent years. Price also has been dropped significantly due to the slowing down of world economic growth and declined in oil prices. Concerns on declining prices, the need to support mandatory program of biodiesel, and accelera4ng replan4ng program are the main reasons behind government decision to impose export levy on palm oil and its downstream products. The objec4ve of the levy is to boost price of palm oil by reducing the amount of palm oil exported, to subisidize biodiesel, and to support replan4ng programme. However, this policy creates winner and loser and it also has significant impacts in the short term and long term. This policy will have nega4ve impact for pure planters, neutral for the integrated industry, and posi4ve for downstream industries and other countries exporters. In the short term, this policy will cause Indonesian palm oil industry to be less compe44ve. In the longterm, provided that mandatory programme on biodiesel is enforced effec4vely, this policy will boost price of palm oil in interna4onal market and thus, benefi4ng the industry as a whole.

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