Puerto rico government

How a price dispute led to Indonesia’s palm oil export ban

Oil palm fruit (Pixabay)

Posted on 13 May 2022 15:08 by

Lowy’s interpreter

[By Johannes Nugroho]

The global vegetable oil industry was stunned after Indonesian President Joko Widodo announced late last month that his country, the world’s largest producer of palm oil, would impose an export ban. While Jokowi, as the president is widely known, cited national cooking oil shortages as the reason for the ban, the true picture is far more complex.

To begin with, the statistical data clearly shows that the apparent shortages of cooking oil in the Indonesian domestic market should not exist at all.

In 2021, Indonesia produced 51.3 million tons of palm oil. Nearly two-thirds of this volume, or 34.2 million tonnes, was exported while the rest was destined for domestic consumption. Of that destined for the domestic market, only 8.9 million tons were used to produce cooking oil.

But something that defied logic undoubtedly happened in Indonesia during the month of March. Hordes of people lined up in stores just to buy cooking oil. The shortages that seemingly developed overnight gave the impression of domestic shortages.

The curious story began in February when the government imposed maximum retail prices (HETs) for palm-based cooking oil at $0.78 per liter for unbranded unrefined cooking oil, 0, $92 for small brands and $0.95 for premium cooking oil. The prices set were part of a policy known as the Domestic Price Obligation (DPO), designed to provide cooking oil, one of Indonesia’s staple foods, at affordable prices.

But the government overestimated the level of acceptance within the industry for the new prices, which were well below market. In December 2021, for example, cooking oil was sold in Indonesia for more than $1.36 per litre.

Unsurprisingly, the industry rebelled. While publicly accepting the government’s directive, major retailers have suspended supplies to shopping malls and markets.

There was heavy criticism of the government as the supply of cooking oil dried up, leading to panic buying and hoarding by those who could still afford it. The chaos and public fury at the end prompted Commerce Minister Muhammad Lutfi to revoke the HET on March 16. The minister argued that by scrapping his own directive, oil traders would be less “tempted to export” cooking oil destined for the domestic market because of price differences. In a parliamentary hearing, Lutfi blamed the scarcity of cooking oil on the domestic market on the existence of “cartels” and “speculators”, but confessed there was little he could do to reduce them.

As soon as the HET was discontinued, an abundance of cooking oil suddenly reappeared in the markets – but at a price almost double the price set by the government, a result that did not sit well with most Indonesians. Sensing public dissatisfaction with high cooking oil prices, Jokowi publicly berated his ministers and asked them to tackle the problem, eventually banning exports.

But Indonesian palm oil producers have claimed the government has scapegoated exporters. Togar Sitanggang, president of the Association of Indonesian Palm Oil Producers (GAPKI), denied that its members have a preference for the export market over its domestic counterpart, adding that recent export figures had indicated a downward trend. Instead, he pointed to the speed with which the government implemented the price changes as the main reason for the ensuing chaos.

There is no doubt that the Indonesian government was humiliated when the palm oil industry did its best to sabotage the DPO. In turn, banning palm oil exports is the government’s countermeasure to force the palm oil industry to toe the line. It is also a public relations exercise to restore public confidence.

The move has precedent in a previous ban on coal exports in January. The coal ban was also a punitive action against the coal industry for failing to meet government expectations under the DPO. Under this policy, the coal industry had been required to supply the public electricity company (PLN) at below-market prices for 5.1 million tonnes. It then turned out that the industry was uncooperative in delivering only 35,000 tonnes. The ban ended after the industry reaffirmed its commitment to the DPO.

Now the question for palm oil exports is when industry and government can reach a compromise. Continuing the ban indefinitely will only hurt both sides, given the size of the industry and its strategic importance to the Indonesian economy. In 2021, palm oil accounted for 13% of Indonesia’s total exports, making it one of the country’s main commodities. The industry is Indonesia’s third largest export source and employs around 3.7 million people.

The ban on coal exports lasted only a month, during which pressure, both domestic and international, intensified on Jakarta to reverse its policy. There is no reason to believe that the palm oil export ban will play out any differently.

Johannes Nugroho is a writer and political analyst from Surabaya, Indonesia.

This article appears courtesy of The Lowy Interpreter and can be found in its original form here.

The opinions expressed here are those of the author and not necessarily those of The Maritime Executive.