The high prices of palm oil enjoyed by producers for at least the past six months may actually turn detrimental to the commodity if allowed to continue to rise, warned an executive of a major Indonesian palm oil producer.
“We must be careful in the future,” Chief Executive Officer of PT Astra Agro Lestari Tbk, Santosa, told journalists in the Talk to the CEO online event on Tuesday (15/2).
Santosa said that the high price of palm oil has steeply narrowed down the price difference with other vegetable oils such as soy bean oil, rapeseed, sunflower and others and thus threaten its price competitiveness. The Indonesian Association of Palm oil Producers (GAPKI) recently attributed the high prices to declining production due to the pandemic, insufficient fertilizing in the previous years and weather conditions, and similar woes experiences by other vegetable oils.
“The price of palm oil and the price of other vegetable oils are no longer too different,” Santosa said.
If the price of palm oil become less competitive and not too much cheaper than other vegetable oils, consumers would be likely to shift to the other oils. The bad rap that palm oil is getting in non-producing countries was not helping too.
Production wise, palm oil is the most efficient vegetable oil. The oil palm fruits that consist the base material for palm oil, can be harvested throughout the year and in term of production per hectare, oil palm is way ahead in productivity than its closest rival, soy bean.
Santosa said that globally, palm oil production has been stagnant if not decreasing. Indonesia itself, as the world’s top palm oil producers, saw production stagnant last year compared to 2020. The stagnant production, if coupled with rising demand for vegetable oil, would eat up into stocks and keep prices at a high level.
“For 2021, compared to 2022, production has practically been stagnant,” Santosa said referring to Indonesia’s national palm oil output.
Astra Agro Lestari itself, he said, still booked a slight increase in production in 2021 but he added that this growth did not come from the company’s one core plantations which he said had now mostly matured and had stagnant production levels. The growth, Santosa continued, came from higher purchases of palm oil from the company’s partners, individual growers around or near the company’s own operations.
Astra Agro Lestari last year posted a 25.6 percent increase in the volume of fresh fruit bunches (FFBs) purchased from its partner growers.
The increasing importance of the company’s partners as suppliers of FFBs has prompted the company to launch a number of digital applications as part of company innovations to improve its services to its partner growers.
The internet-based Sistem Informasi Kemitraan (Partenrship Information System/SISKA) for example, is hoped to be able to improve on the company’s services for its partner growers so that they could also get greater profits from their partnership with the company, Siska made FFB transactions much more effective and efficient.
The high global prices of palm oil have already led to a hike in the price of cooking oil in Indonesia. Cooking oil, a major essential commodity in Indonesia, is mostly produced here from palm oil. The high prices of cooking oil has prompted the government to come out with a number of steps, including setting a ceiling price for cooking oil at Rp 14,000 per kilogram, and the implementation of a Domestic Market Obligation (DMO) and Domestic Price Obligation (DPO) for crude palm oil (CPO), olein and cooking oil.
Under the DMO scheme producers have to allocate 20 percent of the amount they export, for the domestic market.
Santosa said that his company remain committed to abide by the policy. “Concerning the DMO and DPO, whether one likes it or not, this has been decided by the government and we have to support it,” Santosa said.
He said that even though a number of cooking oil producers may face some loss following the obligation to sell their product at a set price,” as long as the price is still above production costs, it is alright.” He said that it was just like facing the fluctuation in world palm oil price.
However, Santosa also reminded that the implementation of the government’s policy should also give consideration to the obligations of companies. He cited sales contracts that had been entered with foreign buyers that had to be honored otherwise the reputation of the firm and the country could suffer from the consequences.
“If we already have a commitment with overseas buyers, we cannot default. If we default, our reputation as a country will face problems,” he said.
Another impact of the DPO policy is that there will be palm oil and olein sold at global prices and also those sold under a DPO price, which of course would be lower.
CPO prices hover around Rp 15,000 per kilogram while the DPO prices for CPO stood at Rp 9,300 per kilogram and for olein at Rp 10,300 per kilogram.