JAKARTA: In mid-march Izawati Dewi, a mother of one, began queuing at 4 am at her local shop to buy cooking oil. By the time it opened, the line snaked 2km through her town in central Java. She was lucky enough to secure a pack. The shortage was nationwide. In East Kalimantan, on Borneo, which produces nearly two-fifths of Indonesia’s palm oil, at least two homemakers have died this month while queuing.
In February Indonesia’s government capped the retail price of cooking oil (made from palm oil) at 14,000 rupiah ($1) a litre for the highest-quality oil, and 11,500 rupiah for the cheaper sort. Overnight, shelves emptied across the country of 273m people. For most Indonesians, imported oil is an unaffordable luxury. On March 16th the price cap was lifted and stocks miraculously reappeared. But in the process, prices have more than tripled.
Meanwhile, Malaysia and Indonesia agreed that global prices of palm oil should be determined by the two biggest producers and they should not compete, Malaysia’s Prime Minister Ismail Sabri Yaakob said after meeting Indonesia’s President Joko Widodo on Friday.
Palm oil prices were among several issues the two leaders discussed in their meeting in Jakarta, he said, without elaborating further on the palm oil discussion.
“Price of palm oil should be determined together by Malaysia and Indonesia and there should be no competition in terms of pricing because Malaysia and Indonesia are the two countries that control the total palm oil exports,” Ismail Sabri said.
The two Southeast Asian nations account for roughly 85% of the world’s palm oil production.
However, top producer Indonesia is struggling to control cooking oil prices at home as producers refer to global prices in their production costs. Authorities have previously said domestic and international prices should not be linked.
Indonesia had earlier this year restricted export volumes and capped crude palm oil and olein prices sold at home but later scrapped the policies.
Jokowi, as the Indonesian president is widely known, did not comment on palm oil in his remarks.
Under pressure, the Indonesian government has reverted to more interventionist measures. On January 26, 2022, without prior consultation with producers, Jakarta set a Rp 14,000 per litre price ceiling for cooking oil. As cooking oil producers voiced concern that the ceiling was much too low, cooking oil supplies began to disappear from the market. There were reports of hoarding, as traders and consumers anticipated further price increases. Producers were also reluctant to produce at the government’s set price, given the rise in CPO prices.
Indonesia’s Trade Ministry has historically relied on various measures to ensure sufficient domestic supply for local producers, to maintain low and stable domestic retail prices. For the CPO industry, these include cooking oil subsidies, a domestic market obligation (DMO) for exporters in the form of export quotas, and more recently, a domestic price obligation (DPO) for cooking oil producers in the form of price ceilings. The DMO quota requires CPO exporters to sell 20 per cent (later 30 per cent) of their export volume for domestic consumption, and the DPO for CPO is set at Rp 9,300 per kilogramme. In January 2022, the government fixed the highest retail price (harga eceran tertinggi, or HET, in Indonesian) for cooking oil producers at Rp 11,500 per litre for bulk and Rp 14,000 per litre for premium packaged cooking oil.
Trade Minister Muhammad Lutfi was quick to blame so-called ’cooking oil mafia and speculators’ for causing these shortages and making it difficult for the government to control price increases. He reported that his team had discovered the illegal use of subsidised bulk cooking oil, the reselling of subsidised bulk cooking oil, and uncontrolled exporting of subsidised cooking oil by such actors.
However, externally rising global demand for CPO and increasing local demand from Indonesia’s growing biodiesel (B-30) activity starting in 2020 had already put upward pressure on CPO prices. For example, the US-China trade dispute led China to switch to palm oil to reduce its reliance on American soybeans, while bad weather in Brazil and India impacted their soybean and rapeseed production, thus increasing global demand for CPO. Lutfi also noted that the Russian invasion of Ukraine has had an unexpected impact, causing a sharp rise in CPO demand worldwide. As Russia and Ukraine are major producers of sunflower oil, disruption in its supply following the month-long war has shifted demand from sunflower to CPO oil.
The average world CPO price has risen by 50 per cent between 2020 and 2021, from US$752 per metric ton to US$1,131 per metric ton. By February 2022, CPO prices had reached a staggering US$1,552 per metric ton, the highest in history (see Figure 1). Together with the spike in demand, global and regional CPO supplies have dropped. In addition to rainy weather leading to floods adversely impacting CPO production in Malaysia, pandemic-related labour mobility issues, supply chain bottlenecks, and high shipping tariffs have contributed to Indonesia’s predicament.