A series of policy blunders by the government on palm oil trade earlier this year resulted in a scarcity of cooking oil and sent some “innocent” industry players to jail. The government is likely to make another policy misstep as it is considering advancing the mandatory 40 percent palm oil-based (B40) program when cooking oil prices remain relatively high.

Industry players, gathering in Bali last week for the International Palm Oil Conference (IPOC) 2022, discussed privately the cooking oil policy mishap that penalized the palm oil industry dearly, but the issue was not officially discussed in the IPOC 2022, which was organized back-to-back with the Group of 20 Sustainable Vegetable Oil Conference.

Some international speakers, nevertheless, highlighted Indonesia’s brief export ban of crude palm oil (CPO) and its derivatives from late April until May as a blunder as it caused Indonesia to lose its share in some markets such as India that resorted to using Malaysian CPO. Speaker Dorab E. Mistry of Godrej International Limited, for example, said he personally wrote a letter to President Joko “Jokowi” Widodo urging him to remove the market-distorting export ban.

According to India’s Solvent Extractors’ Association, Indonesia’s share in India's palm oil imports dropped from 64 percent in 2020 to 43 percent in 2021 and 41 percent in 2022. The association attributed Indonesia’s falling market share to its high export tax and levies, and stated that the ban aggravated the problem.

Meanwhile, Indonesia’s Oil Palm Plantation Fund Management Agency (BPDPKS) projected that Indonesia’s total palm oil exports would drop from 27.73 million tonnes in 2021 to 23.95 million tonnes this year. 

Some industry players privately said that the government’s flip-flopping policy of the export ban and the domestic market obligation (DMO) had cost the industry dearly. In addition to falling market share, they also suffered from the aftermath, such as difficulty in finding cargo vessels to export the produce.

They also complained about what they described as the criminalization of CPO exporters, which the Attorney General’s Office (AGO) blamed for the scarcity of cooking oil. The AGO earlier this year named five suspects in the case, including then-Trade Ministry international trade director general Indrasari Wisnu Wardhana, PT Permata Hijau corporate affairs senior manager Staley Ma, PT Musim Mas general affairs general manager Togar Sitanggang, PT Wilmar Nabati Indonesia commissioner Parulian Tumanggor and trade minister advisor Lin Che Wei. 

The AGO said that the five had colluded so that the three companies received export permits even though they had not supplied enough CPO to the domestic market under the DMO rules.

The AGO blamed the three companies for causing exorbitant state losses of Rp 6 trillion (US$387 million) and economic losses of Rp 12.31 trillion. The court proceedings, nevertheless, revealed that instead of reaping huge benefits, PT Wilmar Nabati suffered a loss of Rp 1.5 trillion from selling cooking oil below production costs as instructed by the government.

For those who closely follow the case, the five suspects are only the scapegoats for the government’s failure to rein in the soaring prices of cooking oil and the scarcity of the commodity. The government’s antimarket DMO and low ceiling prices of cooking oil in time of skyrocketing international prices sent the wrong signals to the market, which resulted in producers holding their produce to avoid losses, causing scarcity and prices rising far beyond the ceiling prices.

The cooking oil policy mishap has caused unspeakable damage to the palm oil industry, and yet, the government seems to have not learned from the mistake as it is currently toying with the idea of advancing the B40 biodiesel mandatory program, which could result in more competition between food and energy and thus would have a negative effect on the government’s target of lowering cooking oil prices.

With the existing mandatory B30 biodiesel, where 30 percent palm oil is blended, Indonesia’s biodiesel industry absorbed 8 million tonnes of palm oil in 2021 and 9.59 million tonnes this year, making Indonesia the world’s biggest producer of biodiesel with 10.45 million kiloliters in 2021 and the third largest biofuel producer after the United States and Brazil. The mandatory B40 program would boost demand for CPO by 35 percent.

Indonesian biodiesel policy has been designed to boost domestic demand for palm oil and absorb Indonesia’s ever-growing output of CPO while the export markets are becoming restrictive because of environmental concerns, and thus prop up prices in the international market. The biodiesel policy, with an established subsidy system managed by the BPDPKS, has proven to be effective in boosting demand, but at the expense of CPO for food needs, which has remained flat at 11 million tonnes per annum this year and last.

Hastily advancing the mandatory B40 biodiesel program is obviously risky as CPO companies would mostly prefer to supply the CPO for biofuel production rather than for cooking oil, as the former has a mechanism in place to compensate CPO producers for price differences but not the latter. After all, biodiesel should not compete with food.

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The writer is executive director of Tenggara Strategics, a research and business intelligence institute founded by the Centre for Strategic and International Studies (CSIS), The Jakarta Post and Prasetiya Mulya University.

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