International trade: Relentless pressure on vegetable oil export

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Bisnis Indonesia - Perdagangan internasional: Tekanan bertubi-tubi ekspor minyak nabati

15 June 2023

By: Indra Gunawan & Hendra Wibawa

Amid the increasing volume of Indonesian palm oil export, the price of this main commodity has been under pressure after the implementation of the European Union Deforestation-Free Regulation. 

Successive misfortunes seem to befall oil palm farmers in Indonesia. At a time when the price of fresh fruit bunch (FFB) was declining, the European Union (EU) approved the international enforcement of the European Union Deforestation-Free Regulation (EUDR) last month. 

The new regulation, which will take effect in December 2024, stipulates seven commodities, namely palm oil, meat, wood, coffee, cocoa, rubber, soybeans, and their derivative products, that must not be a result of deforestation. The EUDR will require the seven commodities that are deemed to be the main causes of deforestation globally to go through an assessment process first. 

Head of the Indonesian Oil Palm Farmers Association (Apkasindo) Gulat Manurung conveyed the pressure on the FFB price directly. According to him, the decline in the FFB price occurred in almost all regions of Indonesia. 

One of the reasons is that many speculators on the international crude palm oil (CPO) market are playing the EUDR issue to obtain the lowest price for this commodity. 

Thus far, many speculators seem to require all CPO products to have EUDR certification. This affected the global CPO price which declined slightly. 

“Even though it was slightly corrected, the CPO price from the [domestic] KPBN CPO tender has dropped even further,” said Gulat to Bisnis on Wednesday (14/6). 

With the decline in CPO price, he revealed that many palm oil mills were selling their CPO at a cheap price. The decline in CPO affected the price of farmers’ FFB as the basic ingredient for CPO. 

“The decline in the FFB price greatly exceeds the decline in the CPO price and it is very unreasonable,” said Gulat. 

According to data from Apkasindo, the FFB price is only Rp1,450 per kilogram (kg)-Rp1,750 per kg. Ideally, the FFB price should be Rp2,500 per kg because the cost of production is Rp2,150 per kg. 

Gulat hopes the government will take action against palm oil mills that purchase FFB from farmers at cheap prices. 

He assessed that the FFB price could be leveraged if domestic absorption could increase. “Increase the CPO absorption of existing customers and expand into new markets,” he said. 

One of the regions that saw a decline in the FFB price was Jambi Province. 

The FFB pricing team for Jambi Province determined that the CPO price would drop significantly by Rp233 per kg from Rp9,697 per kg to Rp9,446 per kg for the period of 9-15 June 2023. 

Head of the Jambi Province Plantation Agency Agusrizal said the pricing team also agreed that the price for palms aged 10 to 20 years would decrease by Rp47 per kg, from Rp2,175 per kg to Rp2,128 per kg. Palm kernel price increased slightly by only Rp5 per kg from Rp4,945 per kg to Rp4,950 per kg. 

This FFB price is for farmers who are partners with palm oil processing companies. 

The FFB price in Jambi for FFB at 3 years of planting is Rp1,676 per kg, 4 years of planting Rp1,775 per kg, 5 years of planting Rp1,858 per kg, and 6 years of planting Rp1,937 per kg. 

The FFB price at 8 years of planting is Rp2,027 per kg, 9 years of planting Rp2,067 per kg, and above 25 years of planting Rp1,963 per kg. 

The declining prices of FFB and CPO are based on the result of a pricing meeting which was agreed upon by the pricing team and attended by business entities, cooperatives, and oil palm farmer groups. 

To maintain the stability of FFB price in Jambi, the government suggested all regencies to form a team to monitor the price of palm oil in their respective regions.

Upward trend

As the FFB price was pressured by the EUDR, the Trade Ministry reported that the export value of CPO products and their derivatives had increased by 20% in the last 5 years from 2018 to 2022. 

Trade Ministry’s Director of Agricultural and Forestry Product Export Farid Amir said that this upward trend was due to the increase in downstream export of Indonesian palm oil. 

According to him, export of CPO derivatives such as refined, bleached, deodorised (RBD) palm oil in 2018 accounted for only 16% and CPO around 16%. In 2022, the percentage of CPO was only at 8% and RBD at 20%. 

“The trend is influenced by demand. The volume is almost the same, but the value is increasing and there is also a downstreaming of export commodities. So, we tend to export downstream products instead of upstream products,” Farid said in a discussion held by Majalah Sawit Indonesia on Wednesday (14/6). 

In the last 5 years, exports of other CPO derivative products have also increased from 24% or US$5.32 billion to 29% or US$12.02 billion. 

Farid also revealed that the export volume of CPO and its derivatives from 2018 to 2022 tends to be stable, while the trend in terms of value tends to increase by 20%. 

In detail, the export of CPO and its derivatives in 2018 reached 34.81 million tonnes or US$22.49 billion. In 2019, it reached 36.24 million tonnes or US$20.00 billion. In 2020, the export volume was 33.51 million tonnes or equivalent to US$23.31 billion. In 2021, it reached 34.50 million tonnes and valued at US$37.22 billion, while in 2022, it reached 35.52 million tonnes or equivalent to US$41.32 billion. 

Farid also predicted the potential demand for vegetable oil in the global market would remain large. This prediction refers to world population growth according to the United Nations, which would double the need for CPO from 156 million tonnes in 2013 to 307.9 million tonnes in 2050. 

“In 2021, the total palm oil production globally reached 75.5 million tonnes. Indonesia accounted for more than 60% of the total palm oil production globally and 22% of the total vegetable oil production in the world [213.2 million tonnes].” 

He said that Indonesia as a stakeholder should be proud of these figures, considering it was able to export 46.88 million tonnes of CPO and its derivative products in 2021. 

“It shows that Indonesia’s palm oil products have the advantage of being used further as the world’s primary supply of vegetable oil,” said Farid. 

In addition to the large opportunity in global vegetable oil, Indonesia needs to pay close attention to the challenges of CPO products and their derivatives. 

According to him, the Indonesian palm oil sector is facing challenges that include accelerating the sustainability transition towards a circular economy system. 

“Focus on optimal waste utilisation in the processing of vegetable oil derivative products, such as used cooking oil, and as a mixture of biodiesel raw materials in the future,” he said.