Special Reports / November 2017

Why Palm Oil Matters to Indonesia

By Muhammad Al Azhari Palm oil has become one of the most important vegetable oils, nowadays contributing 30% of world vegetable oil supply. Demand for palm oil to feed the world and for biofuel continues to increase every year. Indonesia is today the behemoth in the palm oil sector as the world’s top producer and exporter, outstripping Malaysia, which previously held the lead. According to Indonesian Palm Oil Association (Gapki) chairman Joko Supriyono, about 50 million Indonesians depend in their everyday lives on palm oil and its derivatives, be it directly or indirectly, through multiplier effects the sector has created. Palm oil is a strategic commodity for Indonesia’s economic development. Last year it brought $18.6 billion in foreign exchange revenue into the country. As the largest palm oil producer in the world, Indonesia plays a very significant role and the global market closely observes Indonesia’s palm oil market. Analysts note, however, that the industry is forced to deal with a number of challenges from government policies, sustainability practices and issues such as child labor which have to be addressed. Realizing the importance of the industry, the association is hosting in Bali from November 1-3 the Indonesian Palm Oil Conference and Price Outlook, an annual year-end event for global vegetable oil and palm oil stakeholders. The event is held to provide reliable information on palm oil price forecasts, market dynamics, as well as the latest issues in the industry. It’s a major networking event for industry leaders. Supriyono, who is also vice president director at Indonesia’s largest listed palm oil producer, Astra Agro Lestari, spoke to GlobeAsia in a recent interview discussing the issues that matter for the industry. Excerpts: GA: How good was our palm oil production last year and what did exports earn? How much foreign exchange did the industry create? JS: Last year our exports stood at 26.7 million tons, while production was 31.8 million tons. We should be grateful that this country has such a commodity. No other commodity produces such a huge production surplus, at around 77%. This means we also earn huge foreign exchange revenues. This industry has topped the oil and gas sector for foreign exchange revenue contributed to the country. It contributed $17.73 billion in forex revenue last year. How important is the industry to Indonesia? What, for instance, does it contribute to employment? Data from the Investment Coordinating Board (BKPM) shows that the industry employs 5.9 million people via direct employment and up to 50 million in non-direct employment. Please also remember this sector stimulates rural areas. You can see its direct multiplier effects. Regions can grow without the government. Whenever there is fluctuation in the prices of commodities, especially palm oil, nearly all the nation’s economy will be impacted. In Astra group’s case, whenever the price of palm oil is down, sales of Honda motorcycles will also fall. Who are the biggest buyers of Indonesian palm oil? The biggest buyer is India, it bought about 5.5 million tons (of palm oil) last year from Indonesia, and then the next is Europe, which buys 2.5 million tons of our palm oil. Then it is China with 2.5 million tons, Pakistan with 2 million tons. Palm oil plays an important role in the world vegetable oil supply, while demand for palm oil for industry and for biofuel continues to increase every year.  What is the biggest challenge in exporting palm oil? The main enemy is regulation, like dumping. In the United States, they have just set anti-dumping duties on imports of biodiesel from Argentina and Indonesia. This kind of challenge will always be there. The biggest challenge for Indonesia is how we maintain our market share. Our market share at the global market is at about 33-35%. Who are our competitors? There are many, and not just from fellow producers, but also from elsewhere in the edible oil industry. For example, rapeseed, canola oil, soybean. Each different producer of these commodities has imposed policies that support the industries and they are seen as strategic crops, because they represent a large number of constituents who are farmers. There are also non-trade barriers, for example in the form of labeling, and the issue of deforestation. All are challenges that we have to face as the market leader. It all affects our competitiveness. There are other problems we have to deal with internally, for instance we have to improve the nation’s infrastructure to lower palm oil distribution and transportation costs and the government must also offer a conducive investment climate to allow palm oil companies to continue to invest in the sector. Are many countries, including developed nations, getting more protectionist? Yes, the fact is that many countries tend to be more protective of their strategic industries nowadays. Yes, we need the World Trade Organization as the referee in the game of trade, but at the end of the day it is about bargaining power. For example, China today makes it more difficult for our country to export commodities like olein, mangosteen and swallow nest after they protested Indonesia’s policy that forbids their shipments to unload in islands outside Java. Even (US president) Donald Trump applies a more protectionist approach. For Gapki, what’s the strategy to consolidate the industry? Most importantly, we need to work together to improve productivity. From the farmers’ aspect, companies must work out a scheme that offers long-term partnerships which have positive impacts on their welfare. Second, along with the government, we need to push for a conducive investment climate. Third, we need to continue our campaign that this industry is environmentally sustainable. When we are confronted with a trade war, we must fight back with trade instruments. This is an advocacy role that Gapki is performing for the government, we encourage the government to start looking at trade figures from other countries, especially our markets for palm oil. For example, in India, we should improve our bilateral trade agreement. Another major palm oil producer, Malaysia, has done it. How does the government’s new regulation on peat land ecosystem management (Government Regulation No. 57/2016, a revision of Regulation No. 71/2014) affect the palm oil industry as a whole? The regulation will affect about 1 million hectares of palm oil plantation. Many will have to move from the peat land they currently occupy. This will need time and it has to be done step-by-step. Palm oil plantations provide welfare for farmers. The peat land ecoystem regulation is on the right track, but synchronizing idealism with the facts in the field will not be easy. My view on this is that what needs to be conserved must be done. However, peat land that has been cultivated needs to be managed sustainably to give benefit to the people. A moratorium on new palm oil plantations was put in place six years ago, aiming to slow unsustainable agricultural expansion into primary forests and peat lands. How has this worked? Indonesians have planted oil palms in peat land since time immemorial. Our research finds there are plantation areas which have been operating for 80 years. Many are as old as 60 and 40 years. They are doing fine. What the industry needs is to find a way to promote sustainable practices, not a moratorium. The government should be pushing for expansion of the industry. The current administration has its Nawacita (the seven development goals set by President Joko Widodo from the time of his campaign), which include the goal to provide welfare for the people. Palm oil provides welfare for the people, including those living in rural areas. It really helps to stimulate the economy. How hard is Gapki pushing for investment in the downstream sector? Well, not everyone can do the downstream part. It is large-scale business and it is capital-intensive as well as technology-intensive. Naturally, a palm oil company wants to tap the downstream and we are on track. About 70% of our exports are already in the form of derivative products, though the products may not be as sophisticated as those Unilever produces. Also, many companies are traders, not producers. What’s your response to the accusations of child labor? Small-scale plantations may be managed by families, with everyone in the family playing a part. When I was in grade 3 elementary school, I had to help my family on the farm. If the family only has one hectare of plantation, of course the father will invite the wife and children. This is not what is portrayed by the non-government organizations. This industry faces challenges from many interests, including countries wanting to blacken Indonesia’s reputation. You name it, from orangutan, child labor, human rights to environment, they are always used against this industry. But remember this is an industry we should be proud of, a national asset. But without the government’s help, the industry will die so I hope people are not so naive to see the industry only from that perspective.