lndonesian Palm Oil lndustry: Challenges

and Prospects

M. Fadhil Hasan

Senior Economist INDEF

Indonesian Palm Oil Association

Jakarta, Indonesia

Presented at Indonesia Synergy’s Discussion Series

“Can Indonesia Develop and Promote Sustainable Palm Oil?”

Canberra, 20 July 2012

Roles of CPO in the Indonesian Economy

• Pro-growth; the export volume of CPO is 16.5 million tons in 2011, contributing significantly to foreign export earnings of US$ 19.7 billions (about 10% of total export earnings).

• Pro-job; the palm oil industry creates about 4 million employment opportunities , consisting of farmers, plantation and industry workers.

• Pro-poor; palm oil industry supports regional development and poverty alleviation, especially in rural areas of Outside Java

• However, rapid expansion of large-scale plantation often triggers land-conflicts and declining natural forests, stimulating debates at the policy level and the fields

Indonesia’s Revealed Comparative Advantages

Indonesia’s RCA 2000 2001 2002 2003 2004 2005 2006 2007 2008

Non-manufactured 2.03 2.09 2.30 2.33 2.07 2.25 2.32 2.39 2.57

Manufactured 0.74 0.73 0.70 0.67 0.73 0.64 0.62 0.60 0.55

Top Ten Commodities

CPO 24.1 22.97 30.94 30.01 41.79 39.65 40.61 44.58 41.05

Tin 13.45 15.62 20.83 26.11 29.65 34.3 31.41 27.78 37.55

Rubber 9.11 9.14 11 13.27 17.22 14.48 17.55 18.64 18.61

Coal 6.65 7.47 8.14 9.03 9.21 9.5 12.2 12.81 10.48

Papers 2.43 2.34 2.48 2.36 2.42 2.3 2.49 2.53 2.56

TPT 2.2 2.26 2.03 1.99 2.21 2.05 2.03 1.9 1.81

Copper 1.19 1.43 1.76 2.39 2.08 2.26 1.82 2.51 1.87

Electrical Appliances 0.69 0.7 0.75 0.69 0.77 0.66 0.52 0.48 0.47

Chemical Products 0.56 0.52 0.5 0.52 0.58 0.49 0.48 0.53 0.47

Machinery & Mechanics 0.13 0.12 0.14 0.16 0.18 0.2 0.23 0.27 0.28

Source: Calculated from UN –Comtrade, 2010

(Percent; quarter-over-quarter, annualized)

Relatives RCAs

Sumber : Modjo, 2010

2008 Indonesia Malaysia Philippines Singapore Thailand China Rank Notes

CPO 41.05 26.55 8.18 0.34 1.09 0.05 1 Stable

Tin 37.55 7.92 0.95 6.77 4.94 0.07 1 Increasing

Rubber 18.61 5.34 0.45 0.5 16.79 0.09 1 Increasing

Coal 10.48 0.01 0.11 0 0.01 1.06 1 Increasing

Papers 2.56 0.31 0.28 0.22 0.63 0.4 1 Increasing

TPT 1.81 0.63 1.1 0.18 1.08 3.12 2 Stable

Copper 1.87 0.89 4.03 0.31 0.44 0.44 4 Stable

Electrical Appliances 0.47 1.87 3.99 2.64 1.61 2.27 6 Decreasing

Chemical Products 0.47 0.55 0.21 0.88 0.73 0.52 5 Stable

Machinery & Mechanics 0.28 0.23 0.32 0.52 0.86 0.63 6 Increasing

4

Imports 2007/08 2008/09 2009/10 2010/11 August

2011/12

India 5.013 6.867 6.603 6.750 7.100

China 5.223 6.118 5.760 5.950 6.650

European Union 4.960 5.504 5.422 5.100 5.600

Pakistan 1.958 1.957 2.041 2.100 3.300

Malaysia 669 1.047 1.283 1.350 1.400

Egypt 553 1.024 1.174 1.125 1.250

Bangladesh 724 700 951 1.050 1.120

USA 952 1.036 994 930 998

Iran 610 504 548 570 650

Singapore 287 328 352 475 600

Other Countries 9.335 8.579 9.623 10.309 10.403

Total 30.284 33.664 34.751 35.709 37.971 Source : USDA, 2011

World Demand for Palm Oil (1000 tons)

Source: Oil World, 2010

World Production of CPO: Increasing

0

10

20

30

40

50

60

70

80

90

1995 2000 2005 2009 2010 2015 2020

M T

on

Indonesia

Malaysia

World

Source : Oil World (2010) and IPOA (2011)

Country 2010 / 2011 2011 / 2012

Indonesia 24,100 25,900

Malaysia 18.200 18.470

Thailand 1.400 1.600

Colombia 800 900

Nigeria 880 880

Other Countries 3.300 3.400

Total 48.680 51.150

Estimates of CPO Production, 2011/2012

Source : Oil World (2010), USDA (2011)

Production of Vegetable Oils: Increasing

0

5

10

15

20

25

30

35

40

45

50

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Palm Oil

Soy bean

Sunflower

Rapeseed

Production growth of vegetable oils in the last five years:

Palm Oil 9%, Soya 3,5%, Rape 8,5%, Sunflower 7,9%

Source : Oil World (2010)

Expansion of three major vegetable oils from 2005 to 2009: Soybean 4.6 millionsha, rapeseed 5.1 million ha, Oil palm 2,8 million ha

Vegetable Oil Oil Production Traded

Period 2011/12 | 2010/11 2011/12 | 2010/11

Metric Ton Metric Ton Metric Ton % Metric Ton %

Soybean 43.72 41.74 10.17 15.85 10.26 16.69

Canola 22.97 23.57 3.64 5.67 3.60 5.85

Cotton Seed 5.34 4.92 0.18 0.28 0.17 0.28

Sunflower 13.33 12.15 5.03 7.84 4.57 7.43

Peanuts 3.92 4.12 0.22 0.34 0.20 0.33

CPO 51.10 48.68 39.50 61.56 37.60 62.15

PKO 5.86 5.54 3.35 5.22 3.11 5.06

Coconut 3.40 3.17 2.08 3.24 1.98 3.22

Total 149.64 143.89 64.17 100.00 61.49 100.00

Production and Trade of Vegetable Oils (000 ton)

Source : USDA, 2011

FUTURE PROSPECTS OF PALM OIL

The World Bank (2009) estimated that 7.6 billion people will occupy the earth as early 2020. The assumes that the growth rate of world population is 11.6%

The International Finance Corporation (IFC), expects to see the per capita demand for staple food rise by 5% in the same period

Transferred to the need for vegetable oils, this means an additional production requirement of around 27.9 million tonnes vegetable oils in the year 2020

If this demand is to be met with palm oil alone, the cultivated area to be increased by 6.3 million hectares of additional land.

This presupposes, the productivity of the palm oil plantations will increase by 10% within the next 10 years

The situation would look even more precarious if the need be met by soybean. In this case an additional 42 million hectares of land would be needed – more than five times the area in the palm oil industry.

By combining the four main vegetable, the area expansion needed are: palm oil (3,9 million hectares); soybean (6.5 million hectares); rapeseed (14 million hectares); and sunflower (9.7 million hecatres):

As notes:

productivity of soybean 0.37 ton/ha/year and of palm oil 4.14 ton/ha/year (Oil World, 2010)

Future prospects are quoted from Aly Rashad Abdel-Moemin (2011)

Indonesia is the Largest Palm Oil Producer

• Indonesia is the largest CPO producer, reaching about 23.5 million tosn in 2011 and growing at 5,1 percent per year.

• Land expansion of oil palm from 2001 to 2009 in average is 372.000 ha/year or increased by 7 percent per year.

• The growth of palm oil industry in last decade is the largest level ever, similar to the growth level in the 1980s at the initial introduction of oil palm industry.

• However, the productivity gap between smallholders and large-scale plantations is widening (2.86 ton/ha vs. 3.54 ton/ha).

Source : Oil World, 2011

Indonesian Palm Oil Structure

PR = Smallholder Palantations; PBN = Government Plantations; PBS = Private Plantations.

Year Areas (000 ha)

PR % PBN % PBS % National

1980 6 2 200 68,9 84 28,9 290

1990 292 25 372 33 463 41 1.127

2000 1.167 28 588 14,1 2.403 57,8 4.158

2008 2.882 39,1 603 8,2 3.879 52,7 7.364

2009 3.061 38,9 630 8,0 4.181 53,1 7.872

2010 3.078 38,3 637 7,9 4.321 53,8 8.036

2011 * 3.090 37,7 644 7,9 4.466 54,5 8.200

Source: Central Bureau of Statistics, 2011 * Preliminary data

• In term of production, the share of smallholders’ plantation 36% (7,6 million tons), while those of state-owned and private plantation are 12% and 52%, respectively.

• In terms of land area, the share of smallholders is 41%, while that large-scale plantation is increasing to 48%, and the remaining 11% is state-own enterprise, but tend to decrease.

0

2 000 000

4 000 000

6 000 000

8 000 000

10 000 000

12 000 000

14 000 000

2004 2005 2006 2007 2008 2009 2010*

Tabel 1.1 Produksi Kelapa Sawit Indonesia Tahun 2004-2010*/

Productions of Palm Oil in Indonesia 2004-2010*

PR/Smallholders PBN/Government Plantations PBS/Private Plantations

Production of CPO by Industry Group

Year Production

(million ton)

Mature Area

(million ha)

Productivity

(ton /ha)

2008 19,4 4,98 3,90

2009 21.0 5,37 3,91

2010 21,9 5,73 3,82

2011* 24,55 6,28 3,91

Data for 2011 is an estimate

Source : Oil World, 2010 and IPOA, 2011

Productivity Growth of Indonesia’s CPO

Export Destination of Indonesia’s CPO in 2011(%)

EXPORT OF OTHER CRUDE PALM OIL BY COUNTRY DESTINATION 2011

Future Challenges of Indonesian Palm Oil

1. Threats of global economic crisis, triggered by European

cases

2. Trade protection and non-tariff barriers of destination countries

3. Price fluctuation does reflect traditional market mechanisms

4. Concerns of sustainable standards and remerging health

issues

5. Buyer-driven supply chain, as a typical agro-based

commodities (eg: accusation from Nestle, Greenpeace etc is

only a symptom)

6. Unpredictable responses to the alternative energy movement

7. Issues of foods vs. fuels are more real than it was 10 years

ago

Domestic Issues in the CPO Industry 1. Land conflicts, poor spatial planning and peat-land

management

2. Policies on export tax and value added tax do not reflects

the deepening strategy of downstream industries

3. Regional levy and retribution for the shake of local

autonomy

4. Poor infrastructures, connectivity and business climate

5. Moratorium forestry policy due to REDD schemes

6. Inadequate research and development (R&D) strategies

7. Unclear pricing policy for biofuels industry and development

Strategies to face challenges: Global

1. Anticipate the economic crisis, seek new market destinations

2. Improve economic diplomacy and trade negotiations at the

regional and global fora;

3. Strengthen analytical capability for global market changes and

develop hedging and derivative instruments domestically;

4. Improve dialogues on sustainability, especially RSPO & ISPO

and possible enforceability at the field level;

5. Disseminate positive performance of CPO and its derivatives to

counter the negative campaigns of palm oil industry;

6. Improve preparedness for alternative energy development

7. Increase productivity of staple and strategic foods, implement

adaptation and mitigation of climate change.

Policy Recommendation: Domestic

1. Strengthen and finalize the participatory spatial planning at local,

provincial and central government (as stated in Law 25/2007);

2. Earmark the state revenue from export tax for improving the

productivity of smallholder farmers and downstream industries;

3. Remove unnecessary levies and synchronizing central and local

government regulations to improve the competitiveness;

4. Improve infrastructures and support the connectivity (hardware

and software) and the business climate, especially for SMEs;

5. Support the moratorium policy for natural forest and peat lands;

6. Increase R&D funding at least 1% of GDP and strengthen the

innovation policy, and improve the ABGC partnership;

7. Reform the pricing policy for biofuels industry and reallocate the

fossil fuel subsidy for the needy and alternative energy.