Rising palm oil consumption bolsters Indonesian agriculture

Stronger yields are expected in 2017 for Indonesia, which already ranks as the world’s largest producer of palm oil, accounting for 54% of global supply in 2016, according to data from the US Department of Agriculture (USDA). Revised data issued by the Indonesian Palm Oil Association (GAPKI) in March 2017 showed that CPO production in 2016 rose by 10% to reach 32.5m tonnes, above the previously estimated output of 30m-32m.

Although effects of the El Niño weather phenomenon, such as drought conditions, are still being felt in many areas, the USDA reported in March 2017 that crude palm oil (CPO) production for the 2017/18 growing season is projected to reach 36.5m tonnes. This represents a roughly 12% increase from 2016.

PRICE FLUCTUATIONS: The segment witnessed a marginal fall in export volume in 2016, though earnings actually rose due to a global production shortfall that lifted prices. In 2016 the country’s foreign sales from CPO rose by 8% to $17.8bn, despite a 2% dip in volume to 25.7m tonnes, according to the Indonesian Oil Palm Estate Fund. In dollar terms, this meant palm oil accounted for 13.8% of Indonesia’s non-oil exports.

The majority of this increase can be attributed to the behaviour of prices, which rose from $558 to $789 per tonne over the course of 2016 – levels the Indonesian Oil Palm Estate Fund warned could not be sustained long term without causing harm to palm oil’s competitiveness relative to other vegetable oils.

Expectations of increased production and price competition saw Indonesian CPO prices ease in the first and second quarters of 2017; prices fell to $677 per tonne in June, before recovering somewhat to $724 in September. Projections from GAPKI see CPO prices falling to but remaining steady at $710-720 per tonne in 2018.

BIOFUELS BOOST: The sector is meanwhile seeking to increase local demand for biofuel, which would provide a steady market to help hedge any international fluctuations, according to Arif Rachmat, CEO of oil and rubber plantation operator Triputra Agro Persada.

Industry leaders have been in close consultation with senior government officials for an increase in palm oil consumption through public service obligation (PSO) – subsidised biofuel sold through state outlets – while also looking to increase private sales of biofuel. “We are aiming to increase domestic consumption, hence the importance of non-PSO,” Rachmat told OBG. “The target is for domestic consumption to double, but if we can help it rise from 3.5m to 5m tonnes, that would be a successful milestone for non-PSO.”

DOMESTIC CONSUMPTION: Calls for measures to boost domestic consumption of CPO have increased after the European Parliament approved a resolution in April 2017 requiring that all CPO oil imports meet international sustainability standards by 2020. The resolution also called for a ban on all imports of bio-diesel utilising palm oil. If imposed, the restrictions could dampen Indonesia’s CPO export trade with the EU, which currently amounts to more than 3m tonnes annually. Although, in the first half of 2017 Indonesian palm oil exports to the EU rose about 40% from the same period a year earlier, reaching 2.7m tonnes.

Nevertheless, to reduce the risk posed by external factors, the government is looking to boost local usage of biofuels to soak up output previously exported to the EU, Amran Sulaiman, minister of agriculture, said in mid-April 2017. “Europe only imports 3.2m tonnes from Indonesia, meaning that it’s no problem if we don’t export to Europe. We even plan to increase the B-20 to B-30 [20% to 30% mix with normal diesel], which requires 13m tonnes,” he told local media.

Other estimates – citing proposals to increase the palm oil input for electricity generation at oil-fired power stations to 30% of the fuel mix – put the projected rise in domestic consumption at 40%. This would help insulate Indonesia’s palm oil producers from fluctuations in the international market, though it could also erode export earnings potential if new capacity is not taken up by both international and local processors.