El Nino phenomenon: IPOA predicts palm oil production to remain strong

This article has been translated by PwC Indonesia as part of our Plantation News Highlights service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.

Bisnis Indonesia - Fenomena El Nino: Gapki prediksi produksi sawit tetap kuat

24 August 2023

By: Afiffah Rahmah Nurdifa

Bandung - The Indonesian Palm Oil Association (IPOA) predicts that the decline in palm oil production this year will not be as severe as in 2015 and 2019 despite the El Nino phenomenon from August–October 2023. 

In 2015, palm oil production was only 31.07 million tonnes, whereas in 2019, it reached 48.42 million tonnes. 

IPOA Head Eddy Martono said the long dry season (El Nino) this year would not be as severe as it was in 2015 and 2019. 

“This year’s prediction is not like 2019 or 2015, which were quite long. According to the forecast of BMKG [Meteorological, Climatological, and Geophysical Agency], the impact will not be as devastating as in 2015 and 2019,” he said at the IPOA Journalist Workshop in Bandung on Wednesday (23/8). 

He revealed that, in 2015 and 2019, the impact of El Nino was clearly tangible, marked by a 2-year halt of palm oil production. On the other hand, Eddy stated that the fruits will mature late this year due to the lack of rainfall. 

However, he emphasised that IPOA is working together with the government through the Environment and Forestry Ministry to implement weather modification technology. 

“The impact will occur next year because we cannot fertilise this year. Fertilisation should be carried out at least for 6 months,” he said. 

In addition, Eddy said that IPOA members have Standard Operating Procedures (SOP) ahead of El Nino to prevent a decline in oil palm plantation production. 

Prior to the long dry season, he had asked plantation owners to carry out maintenance early, such as fertilising before El Nino. “So that once it occurs and we cannot fertilise, the production after the El Nino will not plummet immediately,” he explained. 

He also forbids pruning fronds before the dry season. Some of these SOPs continue to be disseminated so as not to trigger dangerous impacts in the future. 

Based on IPOA’s records, Indonesian palm oil production during the first half of 2023 was 27.2 million tonnes, an increase from the production of the same period in the previous year of 23.5 million tonnes. 

Eddy also stated that the condition of the palm oil market was declining in line with the deterioration of world vegetable oil prices. 

According to him, this is reflected in the weakening annual palm oil export value. 

Based on IPOA’s data, the export volume of palm oil in the form of Crude Palm Oil (CPO) and Crude Palm Kernel Oil (CPKO) reached 16.3 million tonnes from a total production of 27.7 million tonnes as of June 2023. The export volume as of June this year has increased from the same period last year at 12 million tonnes. Unfortunately, Statistics Indonesia (SI) noted that the palm oil export value fell to US$2.28 billion or 1.51% monthly and 19.25% annually. 

Eddy said the decline in the palm oil export value was due to the drastic fall in world vegetable oil prices. 

“The current conditions are not good. Our exports increased compared to the same period in 2022, but the value decreased because the world vegetable oil prices are declining,” said Eddy. 

The price of other vegetable oils plummeted close to the price of CPO, so that it reduces CPO’s price competitiveness. The decline in vegetable oil prices has occurred since May 2023. 

Eddy emphasised that palm oil commodity pricing is inseparable from movements in world vegetable oil prices, even though Indonesia is the largest palm oil producer in the world. 

“Palm oil is one of the vegetable oils in the world, not the only vegetable oil. Palm oil’s market share is 33%, the rest is other vegetable oils. This means that palm oil cannot stand alone. If something happens to other vegetable oils, it will affect the price of palm oil,” he explained. 

When the Russia-Ukraine war started, it triggered panic in several countries. The reason was that sunflower seed oil could not be exported from Russia and Ukraine. 

This condition caused the price of vegetable oils to increase. On the other hand, palm oil exports from Indonesia were stopped. This was because foreign palm oil buyers understood the abundant supply of palm oil. 

“At that time, production was good, leading to full supply. The FFB [fresh fruit bunches] from farmers could not be accommodated as well and in the end, they rotted on the trees, so the price eventually fell,” he said. 

Eddy emphasised that the pricing of vegetable oils, including palm oil products, is also related to the meeting between market supply and demand.

Establishment of PalmCo 

On a separate occasion, Head of the Palm Oil Agribusiness Strategic Policy Institute (PASPI) Supervisory Board Bungaran Saragih reckoned that the plan to establish PalmCo could strengthen the national palm oil industry. 

According to him, the plan to establish PalmCo also has the potential to support sustainable and equal distribution of economic outcomes. However, he believes that this condition will only be achieved if PalmCo, which is planned to be a sub-holding of PTPN Group in the palm oil business, asserts its position as an institution that mobilises funds for people’s economic development. 

“The only justification for PalmCo in the economy is if its role is emphasised as an agent of development, so that the government can take part in controlling the company’s business strategy for the benefit of the people,” explained Bungaran. 

The Agriculture Minister for the 2000–2004 period assessed that Indonesia still needed an agent of development in the palm oil sector because this country is not only the largest producer, but also the largest consumer of palm oil in the world. 

“Such as cooking oil, biodiesel, and so on. Of course, government policy is still needed to regulate this,” said Bungaran. 

He said that, thus far, PTPN’s role as an agent of development for palm oil was not strong enough. As a result, the government becomes overwhelmed when there is a spike in palm oil prices abroad, as happened last year at the start of the Ukraine-Russia War. 

“It should not be like now. If there are price fluctuations abroad, the government is overwhelmed in securing domestic supplies. Simply overwhelmed. With PalmCo, they only need to give instructions and provide the budget,” he added. 

From the producer side, he explained, PalmCo is still needed to assist smallholder farmers that control more than 40% of national oil palm land or more than 6 million hectares. Much larger than the oil palm land of PalmCo that will be established. 

“So, Indonesia still needs an agent of development in the palm oil sector. To ensure that the quality of plasma oil palm plantations improves, and to ensure that the need for cooking oil or biodiesel for the people can be supplied in the future,” he explained. 

Bungaran also believes that Indonesia cannot downright imitate the business strategies of Malaysian and Singaporean palm oil state-owned companies (SOEs) because those two countries do not have as many plasma farmers and low-income consumers as Indonesia. 

“If more than 6 million smallholder farmers can unite to form cooperatives or other organisations, it could really support PalmCo’s performance even more,” he said.