Skepticism surrounds Bulog's CPO plan

Skepticism surrounds Bulog's CPO plan

JAKARTA (JP): The setting up of a crude palm oil (CPO) buffer
stock started earlier this month by the National Logistics Agency
(Bulog) is drawing criticism from many observers who call it an
ineffective way to bring down cooking oil prices.

Business people in the palm oil industry and market observers
have suggested alternative schemes aimed at pulling down the
prices of cooking oil, a primary foodstuff in Indonesia.

Moh. Nafis Daulay, the chairman of the Federation of Vegetable
Oil Associations, for example, thinks a more effective way to
keep prices at reasonable levels and prevent the commodity from
becoming a major generator of high inflation rates would be to
raise the export tax on CPO to a higher level than, or at least
the same as, that on olein, a derivative of CPO.

"If the government continues to impose a lower level of export
tax than that on olein, producers will continue exporting CPO,
which is more profitable. Olein requires a certain amount of
processing costs," Daulay, who is based in Medan, North Sumatra,
said during a telephone interview with The Jakarta Post last
week.

Closing

Daulay pointed out that high prices on the world market --
mainly due to a decline in the production of non-CPO-based
cooking oil and the small profit margin of cooking oil industries
-- have further driven CPO producers to export their products.

From an estimated production of 4.5 million tons of CPO this
year, about two million tons are being exported and the remaining
2.5 million tons sold domestically.

Daulay said that due to shortages of domestic supplies of CPO,
which is used as raw material in the cooking oil industry, up to
60 percent of all cooking oil producers have had to close down.

He added that due to the building up of the buffer stock,
long-term supply contracts, which were previously conducted
between cooking oil producers and CPO suppliers, have now been
stopped to allow supplies to go to Bulog.

"Long-term supply contracts should not be stopped because
their stoppage will only reduce the amount of CPO on the market
and raise prices again. Any stocking should be done by adding to
the existing CPO stocks, including those used in the contracts,"
Daulay emphasized.

Cooking oil prices began soaring last year and reached their
peak of over Rp 1,600 (70 U.S. cents) around the Idul Fitri
holidays last March.

Bulog, set up to manage the distribution of basic food
commodities and maintain their prices at reasonable levels
through market operations, was unable to prevent the price rise
despite its market intervention efforts and the increase in the
export tax.

In a final effort last month, Bulog challenged the
"nationalism" of private palm oil plantations, when the Chief of
Bulog, Beddu Amang, asked them to help the agency establish a
buffer stock of 75,000 tons of CPO, with state and private CPO-
producers contributing an equal amount for the stock.

This effort, plus the imposition of the export tax and the
approval on CPO imports if necessary, is expected to gradually
cut back cooking oil prices from their current range of Rp 1,547
to Rp 1,400 per kilogram.

Other palm oil observers urged the government to shift its
orientation from relying on upstream CPO exports to downstream
businesses.

Mardjan Ustha, a palm oil business executive, wrote in the
Bisnis Indonesia daily that by reorienting its export targets,
Indonesia would avoid becoming "trapped" in a situation where it
stands as a major CPO producer on the one hand, but as a poor
manufacturer of cooking oil on the other, so that it may fail to
keep cooking oil prices low on the domestic market.

Indonesia, with the current production of 4.7 million tons of
palm oil per annum, is presently the second largest palm oil
producer in the world after Malaysia, with the production of 7.6
million tons.

However, palm oil exports from the two countries differ
greatly in their structure. While Indonesia's palm oil exports
consist entirely of CPO, 99 percent of Malaysia's exports are in
the form of processed palm oil and the remaining one percent is
CPO.

Mardjan pointed out that Indonesia should develop its subdued
cooking oil industry -- which is currently dominated by a small
number of producers -- and refrain from "playing around" with
only the upstream variables.

Owners of major cooking oil industries are presently limited
to the Bukit Kapur Group, the Salim Group, the Hasil Karsa Group,
the Sinar Mas Group and the Musim Mas Group.

Daulay, however, did not consider the domination of the few
private producers a major problem because the companies, which
produce brand name cooking oil, hold only a 25 percent share of
the total domestic market.

The majority of cooking oil producers, which are hit by the
shortages of CPO supplies, he said, are small and medium in scale
and sell their products at traditional market places.

Another way to cut back cooking oil prices was suggested by
H.S. Dillon, an expert assistant to the Minister of Agriculture,
who was quoted by Antara last week as saying that state-owned
companies should have shares in the cooking oil industry if the
government intends to control the prices of cooking oil.

He added that by partly owning cooking oil plants, not only
could the government control the commodity's production level and
prices, but it could also directly manage the industry.

None of the state-owned oil palm plantation firms have entered
the downstream segment of the palm oil industry, which -- apart
from cooking oil -- also includes soap and cosmetics
manufacturing.

A palm oil business executive also suggested that the
government allocate subsidies -- taken from the payment of the
CPO export tax, for example -- for cooking oil procurements on
the domestic market.

This, the executive said, could be done by buying cooking oil
from producers at regular market prices and selling them to the
public at prices which the government felt most reasonable. (pwn)