After years of playing second fiddle to Malaysia, Indonesia has now firmly established itself as the world’s biggest producer of crude palm oil. With production capacity of 19 million tons, this position is unlikely to be challenged going forward.
With international CPO prices stable at $690 per metric ton, this has been a good year for producers. Big guns such as Sinar Mas, Astra Agro Lestari and Sampoerna Agro are in strong positions to increase production, with plans to grow at home and abroad.
Productivity will also improve next year amid rising global demand fueled by India and China. In 2011, Indonesia is expected to export 15 million tons of CPO to the international market, contributing around $15 billion to national export income.
Fadhil Hasan, executive director of the Indonesian Palm Oil Producers Association (Gapki), said prospects would remain stable, although there was the potential for price rises in line with rising crude oil prices.
The recovery of India and China, Fadhil said, had driven up prices and encouraged more production. India alone will need more than 7.3 million tons of CPO in 2011, up from 6.5 million this year, he says.
“Despite the bad weather, economic recovery in several countries has helped the sector find its way back into business,” he said.
The increasing popularity of renewable energy in Europe, where CPO is used to create biofuel, is also likely to boost growth in the industry.
“Indonesia must keep an eye on [renewable energy] policies as they will scale up CPO prices,” said Bayu Krisnamurti, the deputy minister of agriculture.
At $690 per ton, the price of CPO has increased markedly from its lowest point of $430 at the end of 2009. Nevertheless, concerns remain over the Indonesian government’s progressive export taxes.
“The export tariff is a state initiative to generate income, but the result is far from the original objective of stabilizing downstream CPO products such as the price of cooking oil,” said Fadhil, noting that the tax varied from 1.5 percent to 25 percent depending on CPO prices.
Mohammad Wafi, an analyst at E-Trading Securities, is optimistic demand will remain strong. “The CPO business will never die because it is related to basic needs,” he said. “The beauty of this business is that because planters can easily predict exact levels of production, they can also confidently predict revenue.”
Looking to the future, Wafi said Indonesia should think seriously about creating more profitable value-added products from CPO rather than shipping it off wholesale, increasing the benefit to the economy.
While tension between environmental groups and the CPO industry is a reality - Sinar Mas is a popular target - many argue that this does not have to be the case.
Berry Nahdian Furqon, from the Indonesian Forum for the Environment (Walhi), says that production could easily be doubled by optimizing existing land rather than cutting down virgin forests. According to Walhi, only seven out of 18 million hectares of concession land is being used by CPO producers.
Major CPO companies, both domestic and international, have contributed to massive deforestation in Indonesia, Walhi says. The group recently filed a complaint with the Malaysian government alleging Sime Darby’s misuse of land in Kalimantan.
Conflict with communities where oil palms are planted is also a serious issue, Berry said, referencing a Sawit Watch report. “In most cases, villagers are forced to plant oil palm and are not given the opportunity to plant other commodities,” he said, adding that some of the workers are paid less than minimum wage.
The government’s inaction has led green groups to call for a moratorium on plantation licenses.
“We are not against the CPO business, but we want all parties to be transparent and fair in their business activities,” Berry said.
Despite criticism from environmental groups, local planters are confident about future CPO prospects. It is also worth noting that the environmentalists are not perfect either: A report released by the Indonesian branch of Greenpeace in the lead-up to the recent climate change talks in Mexico was criticized by scientists as misleading.
The truth is somewhere in between, but the industry is far from innocent. Achmad Mangga Barani, director general of plantations at the Ministry of Agriculture, does not deny the difficulties. “But the problems associated with the CPO industry are outweighed by the benefits,” he said.
While that debate is under way, campaigns by international NGOs have had a strong impact on the CPO trade. This year, Nestle, Burger King and Cargill canceled contracts with Sinar Mas after allegations of its operations causing environmental destruction.
While the environmental groups are unlikely to be subdued in the future, it looks certain that neither will Indonesia’s palm oil industry.