Stabilization of CPO prices

Stabilization of CPO prices

From Ekonomi Neraca

In line with the government's effort to expand oil palm estates managed by both the private sector and the government, the production of crude palm oil (CPO) is increasing with each passing year.

Palm oil production in 1994 stood at 4.3 million metric tons. It continued to increase in the coming years as follows: 4.5 million tons in 1995, 4.9 million tons in 1996 and 5.4 million tons in 1997. The production level in 1998 is estimated to stand at 5.6 million tons and in 1999, 5.8 million tons. In the first three years of the next millennium, production levels are estimated to be respectively 6.07 million tons, 6.3 million tons and 6.2 million tons.

CPO is now a prime product of Indonesian commodities plantations. Processing 100 tons of CPO will produce 72 tons of cooking oil, 22 tons of fat to make margarine and four tons of distilled free fatty acid. The remaining two tons evaporate in the process.

CPO prices, fluctuating at home and abroad, usually refer to the CIF Rotterdam price.

This CIF Rotterdam price also fluctuates depending on supply and demand. Indonesia and Malaysia are both large producers of CPO. Malaysia consumes most of its CPO domestically. So Indonesia may be said to be the world's sole CPO exporter. Understandably, world CPO prices will be influenced mostly by Indonesia's political and economic conditions.

Statistics show that prices do not fluctuate much abroad. Between January 1997 and January 1998 there was only a rise of US$537/ton to $589/ton. This price increase came about particularly in late 1997 and early 1998 as a result of Indonesia's CPO export ban.

It is absurd that CPO prices are determined in Rotterdam while in the Netherlands there are no CPO companies. It means that Indonesia's CPO prices are determined by another country. Malaysia takes care of its CPO prices through the Kuala Lumpur Commodity Exchange, a commodity bourse that Indonesia does not yet have.

Prices basically affect production and consumption. If both buyers and sellers agree on a certain price in accordance with the market condition, then supply and demand will be in balance.

In Indonesia, however, the prices of CPO and cooking oil greatly depend on the prices set in Rotterdam (quoted in U.S. dollars). So any change in the exchange rate of the rupiah against the dollar will result in a change in local prices of palm oil.

In this context, the Indonesian Federation of Vegetable Oils Association (FAMNI) believes that to stabilize the prices of cooking oil in Indonesia, the exports of CPO, cooking oil, stearin and RBD olein must be liberated.

Besides, the proceeds from these export must be sold to the government at a rate of Rp 5,000 to the dollar. Furthermore, these exports must be exempt from export tax. And finally, these commodities must be freely traded between regions without any levy imposition.

In this way, the value of the rupiah would return to its proper rate and producer exporters would continue to enjoy the proper profits from their exports at a government-stipulated exchange rate. (The export price of CPO to be used would be 60 cents by Rp 5,000/kg, equals Rp 3,000/kg.)

Last but not least, there would be enough domestic supply of cooking oil because if the domestic price was higher than overseas prices, producers would not be encouraged to export their CPO.

H. TARMIDZI RANGKUTI

Deputy General Chairman

of FAMNI, Jakarta