Stocking cooking oil
Stocking cooking oil
We don't see any urgent reason compelling the National
Logistics Agency (Bulog) to build up 75,000 tons of olein and
crude palm oil buffer stocks to bring down the cooking oil price
to Rp 1,400 (US$0.62) from about Rp 1,550 per kilogram now. After
all, the cooking oil price has declined from its peak of Rp
2,000/kg in February, the import tariffs on non-CPO cooking oil
have been reduced to zero percent and new investors are now free
to build CPO refineries without having to develop oil palm
estates.
True, Bulog has to guard the stability of food prices,
especially because inflation exceeded 5.3 percent in the first
half of this year. The question, though, is whether the objective
is fully commensurate with the costs of the buffer stock
management and the market distortions caused by the ad hoc
measure.
We think tying up Rp 125 billion ($55.5 million) in buffer
stocks and forcing state and private companies to sell their CPO
into the buffer stocks below market prices constitutes too costly
an ad hoc measure. However important the anti-inflation program
may be, the costs related to the buffer stock management are
still too high.
Allocating such a large amount of scarce resources for
stabilizing the price of cooking oil is exacting a high
opportunity cost. The fund is worth almost five CPO fractionation
plants.
Moreover, we don't believe the measure will be effective in
maintaining stability in the cooking oil price in the long term.
The problem, we think, is not the shortage of supply. Indonesia
is the world's second largest CPO producer with an annual output
of 4.5 million tons and national demand is only about two million
tons a year.
The market reality is that the international CPO prices have
been on the rise since last year and there is nothing Bulog can
do about the international market trend. The market mechanism
will bring about an equilibrium price. When the market considers
CPO prices too high the consumers will shift to other kinds of
edible oil and the consequent decrease in the demand for CPO will
reduce its prices.
What Bulog should do is to investigate the alleged cartel-like
practices in the marketing of CPO-based cooking oil, which is
dominated by only two or three business groups. The cooking oil
market seems very much like the cement market.
Moreover, we are also puzzled by the fact that although state-
owned plantation companies dominated the CPO industry until the
mid-1980s none of them has gone downstream to produce cooking
oil. It is indeed in the spirit of a market economy to allow
greater opportunities for the private sector. But now, when the
state plantation companies are being required to compete on a par
with the private ones, we don't understand why state oil palm
plantation companies, which still account for over 40 percent of
the national CPO output, are still facing bureaucratic barriers
to entering the downstream industry.
As long as the cooking oil industry is dominated by only two
or three producers, the domestic market will remain at the mercy
of the few suppliers. So it is most imperative for the government
to see to it that PT Perkebunan Agroindustri Nusantara, which was
set up jointly by all of the state plantation companies in 1992
as their industrial arm, faces no barriers to entering the
downstream CPO-based industry.