The palm oil puzzle

The persistent volatility of the price of cooking oil above the official level should have awakened the government to the blunt reality that market-control measures without the support of subsidy spending are not an effective way to either ensure supply or control prices. However, the government seems unwilling to learn from the failure of the series of antimarket measures it has imposed since earlier this year. It is now running the great risk of making another big mistake, namely destroying the nationwide cooking-oil distribution system.

It was most puzzling to note how the domestic market remained short of stock during the first four months of this year even though the blanket export ban was still in effect. Seen from the supply-demand perspective, this did not make any sense at all. As the world's second largest producer after Malaysia, with an annual output of more than six million metric tons and domestic demand of only about 3.5 million tons, the country actually has an exportable surplus of more than two million tons.

The government stubbornly ignored the warnings from businesspeople and analysts that the export ban would never be effective for a country like Indonesia with so vast a coastline and a government notorious for its corruption. Moreover, given Indonesia's role as the second largest producer, the export ban further increased the differential between international and domestic prices.

The potential profit had become so big, as a result of the 80 percent depreciation of the rupiah, that the temptation to smuggle, through collusion with local officials, was hard to resist. Smugglers had a powerful leverage to make local officials turn their eyes away from contraband trade.

The imposition of export taxes of as high as 40 percent in April and up to 60 percent as of early July in lieu of the export ban should be more successful in discouraging exports because exporters would get only 40 percent of the international prices with the other 60 percent going to the state coffers.

But this measure may also meet a similar fate because the government is about to commit another big mistake. By assigning cooperatives, irrespective of their experience, to be the main distributors for wholesale and retail chains, the government risks destroying the distribution system developed over decades by the 12 major cooking oil producers.

True, the price of cooking oil, as one of the basic staples, should be kept at a level affordable for the general public. But the root problem is not so much the "profiteering" attitude on the part of old distributors, as the government seems to see it, but the rupiah's exchange rate. As long as the rupiah remains below 13,000 against the dollar, the market dictates that exports, let alone smuggling overseas, are still more profitable than domestic sales even with a 60 percent export tax.

But building from scratch a completely new distribution system involving cooperatives almost to the complete exclusion of noncooperative distributors may neither ensure adequate domestic supply nor stabilize the cooking oil price in the long term. Developing a distribution system takes a lot of time and involves big investments.

It would be much better for the government to periodically raise the buying price, Bulog, as the monopoly holder, pays to producers an amount that gives them a reasonable margin and at the same time removes the big differential between domestic and international prices. The government can simply use the huge revenue already accrued from the export tax to subsidize Bulog's sales prices to wholesale traders.

Of most importance, though, is that Bulog should always procure cooking oil through a competitive bidding procedure and allow all trading firms, not only cooperatives, to distribute the subsidized cooking oil. But even this measure would not be effective unless Bulog is tightly audited and the government is serious about preventing smuggling.