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)