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.