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With ban on palm oil exports, Indonesia reaps condemnation and praise

Oil palm plantation next to rainforest in Borneo, Indonesia. Image by Rhett A. Butler / Mongabay.

  • Indonesia, the world’s biggest producer of palm oil, announced it would ban exports of the commodity starting April 28 to address a domestic cooking oil shortage.
  • The move has elicited a mixed response, with economists and a leading oil palm farmers’ union saying it will destroy the lucrative industry, including hurting small farmers.
  • But another farmers’ group says the move is a necessary step toward a wider reform of the industry to devolve control from a handful of conglomerates to small farmers.

JAKARTA — Indonesia, the world’s biggest producer of crude palm oil, has ordered a ban on the export of the commodity starting April 28 to address an ongoing shortage of cooking oil in the country.

President Joko Widodo announced the ban on April 22, set to run indefinitely, saying he wanted to ensure the country has enough cooking oil amid a general surge in food prices both domestically and abroad.

Palm oil, of which Indonesia produces 59% of the global supply, is the dominant vegetable oil used to make cooking oil in Indonesia. Since late last year, however, Indonesia has suffered from acute shortages of cooking oil. When supplies are available, prices have often been multiples of what the product would usually retail for.

Industry observers attribute the problem to producers shirking their obligation to allocate a portion of their production for the domestic market, in favor of selling it overseas, where prices of crude palm oil are riding on an all-time high.

“I will monitor and evaluate the implementation of this policy so availability of cooking oil in the domestic market becomes abundant with affordable prices,” Widodo said in a statement.

The decision to force palm oil producers to now sell their product domestically, at lower prices than they could get overseas, has met with a mixed response. Economists have criticized the ban as a misguided policy, noting that similar export bans of other commodities have proved unsuccessful.

Bhima Yudhistira Adinegara, director of the Center of Economic and Law Studies (CELIOS), a Jakarta-based think tank, pointed to a temporary ban imposed in January this year on coal exports. That move was prompted by fears of a looming power outage for 10 million households as coal producers were skipping out on their domestic sales to take advantage of higher coal prices overseas.

“Did the problems go away? No,” Bhima said as quoted by local media. “Instead, [Indonesia] was protested by overseas potential buyers. These kinds of policies need to be stopped.”

Dendi Ramdani, vice president of industry and regional research at state-owned Bank Mandiri, agreed that the export ban won’t solve the core problem of cooking oil availability and persistently high prices. Instead, he said, it will cause an artificial shortage on the international market, further driving up global palm oil prices that Indonesian producers won’t be able to benefit from because of the export ban.

“Instead of solving the problem of cooking oil availability and price, this policy will instead destroy the palm oil industry and revenue for the state,” Dendi said as quoted by local media.

He said the country could lose up to $2.2 billion in export revenue if the ban lasts for one month.

And while the international market will see a supply crunch, the domestic one will be flooded with palm oil, driving down prices for producers, including the small farmers who grow much of the palm fruit that’s processed into oil, according to Henry Saragih, chairman of the Indonesian Farmers Union (SPI).

He said Indonesia was estimated to produce 46.9 million metric tons of crude palm oil this year, while domestic demand is only expected to reach 16.9 million metric tons. This would leave a supply glut of more than 30 million metric tons that can’t be exported.

Farmers in some palm oil-producing regions, like Riau and North Sumatra provinces, are already seeing prices for their harvest of palm fruit dropping by 30-50%, Henry said.

GAPKI, the national association of palm oil businesses, said it would comply with the ban, but expressed reservations about it continuing indefinitely.

“If it turns out that the impact of this policy is not positive, it’s better for the government to immediately reevaluate the policy,” GAPKI secretary-general Eddy Martono said as quoted by local media.

Oil palm plantation in Riau, Sumatra, Indonesia. Image by Rhett A. Butler/Mongabay.

Calls for industry reform

The export ban has also elicited some support, notable from the association of palm oil farmers, or SPKS, which calls it a necessary move to ensure the availability of affordable cooking oil in Indonesia.

Without the ban, palm oil companies will keep prioritizing exports, which command higher prices, over supplying the domestic market, where prices are been capped by the government, according to SPKS secretary-general Mansuetus Darto.

“Businesses are always busy thinking about supplying their products overseas because it’s [more] profitable and they forget their duty of meeting the domestic demand,” he said as quoted by local media.

But the problem of cooking oil shortages and high domestic prices will persist without a systemic shift in the country’s palm oil industry, Darto said.

He said the problem with the industry is that it’s controlled by a small number of conglomerates. Four major industry players control nearly half of the domestic market for cooking oil — or a quarter of the global supply — according to 2019 data from the KPPU, the government’s business competition watchdog. These producers have businesses throughout the supply chain, from oil palm plantations to processing mills to cooking oil refineries.

This gives them leverage to dictate the market, allowing them to prioritize exports at a time when cooking oil is in short supply domestically.

Darto called on the government and state-owned enterprises to build small- and large-scale cooking oil refineries that are integrated into the industry’s supply chain. He said oil palm farmers’ cooperatives also need to be strengthened so that smallholders can have a bigger say in determining prices that are currently dominated by big companies.

“This move needs to be done so that the state doesn’t always lose from a small number of businesses,” Darto said.

SPI’s Henry agreed that the plantation industry must be managed by the people with support from the government and state-owned enterprises, and not by big companies.

“Corporate oil palm plantations have turned forests into monoculture crops, getting rid of the richness of our forests as well as water sources in the form of swamps, rivers and others,” he said in a statement. “Palm oil companies have also proven to be bulldozing the lands of farmers, Indigenous peoples and locals, damaging local infrastructure.”

Henry added that companies often violate the law, failing to meet their obligations stipulated in their permits and not paying their fair share of taxes to the state. He noted that there are more than 4.7 million hectares (11.6 million acres) of corporate plantations — an area half the size of South Korea — that are operating outside their legally permitted concessions, including in forest areas.

Therefore, the management of the country’s plantations should be relegated to farmers through cooperatives, Henry said.

“The state should play a role in this transition by conducting agrarian reform, [where] plantations that are more than 25 hectares [62 acres] in size are included in the agrarian reform program,” he said, referring to a program through which the government aims to issue titles for more than 9 million hectares (22 million acres) of land to small farmers.

To fund the transition, the state can use the export levy collected from palm oil companies, Henry added.


Banner image: Oil palm plantation next to rainforest in Borneo, Indonesia. Image by Rhett A. Butler / Mongabay.


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