On the heels of the recent announcement of a controversial tax on palm oil exports from the Trade Ministry comes another plan. This time, Fahmi Idris, head of the Industry Ministry, is proposing that the government implement a domestic market obligation (DMO) on crude palm oil producers to force them to sell a portion of their products locally.
On the sidelines of the International Conference and Exhibition on Palm Oil in Jakarta on Wednesday, Fahmi said a DMO scheme could be applied along with the export tax and would ensure domestic supplies of CPO as well as control the price of cooking oil to ensure that it did not rise to unmanageable levels.
“[The DMO] would secure domestic stocks of cooking oil and its price,” Fahmi said, after his address at the opening of the conference.
Prices of nonsubsidized cooking oil on the domestic market are Rp 9,500 to Rp 10,000 a liter and have increased from about Rp 8,000 to Rp 9,000 a liter from about two weeks ago in line with the gradual increase of CPO prices, which have been slowly recovering from a crash in value late last year.
The proposal, however, was criticized by a Coordinating Ministry of Economic Affairs official.
Bayu Krisnamurthi, deputy of agriculture and marine at the ministry, said that the step would not be effective in controlling palm oil prices on the domestic market.
“Learning from previous experiences, the DMO policy will be ineffective when applied to CPO,” Bayu said on Wednesday.
The government earlier attempted to implement a DMO requirement on CPO in June 2007 as the CPO price increased.
The policy was applied based on the law issued in 2004 on plantations to secure domestic supplies, with reports saying the government had asked palm oil producers to earmark 150,000 tons for the local market.
However, a plan to legislate for a DMO obligation was later abandoned after resistance from producers, who said that it could lead to increased smuggling of the commodity.
In a bid to help low-income families, the government has also attempted to intervene in the market by encouraging producers to sell a cheaper nonbranded cooking oil under the Minyakita scheme.
However, compliance with the voluntary scheme has been low, with half of the producers believed to be unwilling to sell the oil for the current set price of Rp 7,000 a liter.
Instead of the DMO, Bayu said that the re-implementation of the progressive export tax system on CPO would be more effective in keeping local stocks of CPO high.
Under the system introduced by the government through the Ministry of Trade, Indonesian CPO exports would be taxed at 3 percent because the price on the Rotterdam CPO market has been calculated at averaging $774 a metric ton.
In a nod to the economic conditions, the base price on which the tax kicks in has been increased from the previous $540 a metric ton to $700, meaning that the producers do not have to pay tax below this level.
However, with the scheme’s reintroduction, the rate of the tax rises as prices increase and producers could pay as much as 17 percent in tax if prices breach their old highs.
The Trade Ministry earlier scrapped the progressive export tax on CPO in November when prices plummeted by 48 percent in the global economic downturn before recovering this year.
Gandhi Sulistiyanto, the managing director of PT Sinarmas, which exports about 20 percent of its output to China, Europe and India, said imposition of the tax would hurt the industry, cutting into its competitive edge with rivals, including No. 2 producer Malaysia.
Palm oil plantations in Indonesia produce about 20 million tons of per year, of which 3 million is allocated for domestic consumption.
Malaysia, the world’s second-largest grower, produces 19 million tons per year.