Wed, 06 Feb 2008
Achmad Syafriel, Research Analyst

Without self-sufficiency in food supply, Indonesia may continue to lose out in the midst of a global surge in commodity prices.

Over the past two years, prices of soft commodities such as palm oil, soybean, corn and wheat have sky-rocketed and reached historical highs.

For example, palm oil increased 88 percent from US$570 per metric ton at the beginning of 2007 to $1,069 per metric ton, while soybean rose 78 percent in 2007 and reached its new historical high at $13.4 per bushel.

Of course the rise of these commodities is closely linked to the climb in crude oil prices. Crude oil prices have departed from around $60 per barrel in mid 2006 to currently above $90 per barrel.

Since the surge in crude oil started two years ago, many countries have tried to lower their dependence on fossil fuels by seeking alternative fuels.

Most recently, the U.S. government issued its new energy law: The Energy Independent and Security Act of 2007. The law aims to reduce U.S. dependence on crude oil particularly from foreign sources, by expanding the country's biofuel production to 9 billion gallons in 2008 and to a further 36 billion in 2022.

The main form of biofuel in the U.S. is bioethanol and it is produced mainly from corn.

To ease the strong demand for corn as a main feedstock, the U.S. plans to develop and produce bioethanol from cellulosic ethanol.

Since current bioethanol capacity only reaches 6.3 billion gallons, higher demand for corn is expected to push corn prices even higher, as in 2007.

The increase may lead to farmers planting more corn and fewer soybeans.

According to the U.S. Department of Agriculture, farmland planted with soybean-plants in the U.S. shrank 16 percent year-on-year to 64 million acres last year.

Naturally this will lead to lower soybean supplies and higher soybean prices.

Since CPO is a soybean oil substitute, the recent surge in CPO prices should have come at no surprise.

In previous articles, we said the need for biofuel will put upward pressure on food prices.

Traditional food demand for commodities such as CPO and soybean had already been high even before biofuel came into the equation.

China and India, the two most populated countries in the world, have also been key drivers of demand.

On the other hand global warming and climate change add more supply uncertainties. Severe winter storms in China have significantly damaged major crops including rapeseed, vegetables, and wheat in 16 provinces.

As reported in Bloomberg, more than 15 million acres of crops were damaged, and more losses are expected as storms may intensify, according to the Chinese Minister of Agriculture.

Before the natural disaster, China had been expected to import 2.8 million metric tons of soybean oil and 5.5 million metric tons of palm oil in 2008, according to the United States Department of Agriculture (USDA).

Due to this severe winter weather, in our view, the figure would naturally increase.

The USDA expects India to import 1.4 million metric tons of soybean oil and 4.1 million tons of palm oil this year due to insufficient domestic production.

In 2007 India cut the import tax for edible oil four times to boost domestic supply and ease inflation.

Last year India imported 4.8 million metric tons of edible oil, up 7 percent from 2006.

As a major producer of CPO, Indonesia should benefit from this situation. According to the Indonesian Palm Oil Committee, Indonesia exports some 11.1 million metric tons of CPO in 2007.

Assuming average price of US$650 per metric ton, Indonesia may generate some US$7.2 billion of export revenues in 2007.

But unfortunately Indonesia is also a major consumer of CPO. Most Indonesian dishes use cooking oil, which is mainly made from CPO.

Indonesia's domestic need for CPO amounts to around 6 million metric tons per year.

The same case applies for soybeans.

Tempeh and tahu (tofu), both made from soybeans, are favorite foods, but most soybean needs are imported.

Indonesia only produces 800,000 tons of soybean but imports more than 1 million tons of it.

Recently, soybean prices in Indonesia soared, causing a hike in tempeh and tahu prices, thereby making them disappear from the dining tables of many low income households.

After protests, the government abolished import duties for soybeans.

It may also have to lose a significant sum of fiscal revenues.

For price stabilization, the amount involved sums up to Rp13.7 trillion; i.e. Rp3.6 billion for additional food subsidies and Rp10.1 trillion in the form of forgone tax revenues.

Fiscal revenues reportedly could be impacted by Rp26 trillion, although this could be minimized if the government decides not to lower current income tax rates.

The key point is, unless the country is self sufficient in its food supply, there will be a high price to pay in the midst of the global energy crunch.

Eroded fiscal revenues are just part of the story. There are also long term losses in the form of reduced nutrition intake, incalculable as it is.

According to FAO standards, a country is said to be self-sufficient if it could produce 90 percent of its domestic needs.

The government must work hard to head towards that figure.



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