Palm oil industry: El Nino will 'fry' CPO price

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Bisnis Indonesia - Industri kelapa sawit: El Nino akan ‘goreng’ harga CPO

9 May 2023

By: Ni Luh Anggela & Indra Gunawan

Some palm oil businesses are starting to be concerned about the threat of warming sea surface temperature or the El Nino phenomenon that may cause a decline in national palm oil production. 

Head of Indonesia Palm Oil Association (IPOA) Eddy Martono has expressed this concern. He said the threat of El Nino this year could directly impact on crude palm oil (CPO) production. However, he predicted that the impact of El Nino would only be felt next year. 

“If El Nino occurs this year, the impact will only be felt next year,” he told Bisnis recently. 

Eddy reasoned that the fruits could mature quite late this year if Indonesia is hit by El Nino. With the delayed palm fruit maturity, he emphasised, the impact would only be felt in the following year. 

The threat of declining CPO production due to El Nino would automatically lead to increased cooking oil prices in the people’s market. 

Director of the Indonesian Vegetable Oil Industry Association (GIMNI) Sahat Sinaga did not deny that the El Nino phenomenon, which triggers high water vapor, had caused many floods in oil palm plantation areas in North Sumatra and West Sumatra. However, he emphasised that it is not a major concern. The reason is that the oil palm plantation areas in 25 other provinces are affected by dry air, and some of the oil palm plantations are still producing well. 

“The possibility of declining palm oil production due to uneven El Nino is not very significant,” said Sahat on Monday (8/5). 

In principle, he noted that oil palm trees could survive if rainfall is at 3,000 millimetres per year, sunlight is present between 7 and 8 hours a day, and the humidity is around 90%-93% RH. These conditions allow for a proper pollination of palm fruits. If supported by good fertilisation, he added, palm oil production will be abundant provided that the palm seeds for these trees are superior seeds. 

“If the seeds are low-quality, then any weather would not affect [the productivity] that much,” said Sahat. 

Therefore, he hopes that all parties would not exaggerate the threat of El Nino to the palm oil industry, especially cooking oil. 

On the other hand, he noted that there are three crucial issues in the palm oil industry. First, the anti-deforestation regulation of the European Union (EU). Second, a large portion of oil palm plantations that are still in the forest category, and third, the sluggish global market. 

According to him, the EU regulation that rejects palm oil products that are linked to deforestation has resulted in an uncertain future for many oil palm plantations because they are still categorised as ‘located in forest areas’. 

He provided an example that neighbouring country like Malaysia could claim that its CPO products come from deforestation-free locations through accurate data collection on oil palm plantation areas. “I believe the EU will accept the statement. On the other hand, it becomes a question in Indonesia about who is trusted by the EU to issue such deforestation-free declaration letter.” 

According to him, it is the regulatory problem with the EU that has clearly affected Indonesia’s CPO production instead of El Nino. 

Government anticipation 

Meanwhile, the government also claims to have anticipated the threat of El Nino causing a decline in CPO production. 

Head of the Trade Policy Agency of the Trade Ministry Kasan Muhri said that the decline in CPO production could lead to increased cooking oil prices in the people’s market. 

As of 1 May 2023, the government has anticipated rising cooking oil prices triggered by El Nino through a special cooking oil policy, including by reducing the ratio of CPO export rights quota to 1:4. 

In addition, the government also monitors the movement of the raw material supply for cooking oil and provides incentives for packaged cooking oil. 

“That is also part of our anticipation for domestic needs, because we also consider that the current export rights remain sufficient for producers or exporters to carry out their export activities,” he explained. 

Deputy for Food Availability and Stabilisation of the National Food Agency (NFA) I Gusti Ketut Astawa added, NFA has set food reserves, especially cooking oil, at 100,000 tonnes in the initial phase. 

“We have ordered Bulog and ID Food to prepare these food reserves and they will be used to stabilise supply and prices,” he explained. 

In the next phase, he added, NFA will increase cooking oil reserves between 200,000 tonnes and 300,000 tonnes. 

Based on experience in 2015, the impacts of El Nino indeed caused widespread drought, including massive forest and land fires.