- Indonesia is the world’s top producer of palm oil, but has in recent months been hit by scarce supplies and high prices for vegetable oil.
- The country’s business competition regulator points to indications of cartel practices by the handful of conglomerates that dominate the industry.
- But government policies may also be to blame, experts say, including incentivizing palm oil producers to sell to the government’s biofuel program instead of to cooking oil refiners.
- Parliament has called hearings on the issue, while the competition watchdog has launched a formal investigation.
JAKARTA — Cartel practices have been blamed for a scarcity of cooking oil in the world’s top producer of palm oil — but government policies seen as coddling the industry have also come under scrutiny.
Households across Indonesia have since last October experienced acute shortages of cooking oil. Even when supplies have been available, prices have often been multiples of what the product would usually retail for.
The scarcity has prompted widespread complaints from regular citizens and from politicians, with parliament launching hearings into why Indonesia, which produces more than half of the world’s crude palm oil, by far the dominant source of edible vegetable oil, is running out.
“It means that there are parties that are playing [the market] in this cooking oil issue, including in determining the retail prices of cooking oil in the market,” said Ahmad Muzani, a deputy speaker of the People’s Consultative Assembly (MPR).
In a stop-gap measure, the government in late January capped the price of palm cooking oil at retail outlets at 14,000 rupiah (about $1) per liter. But it removed the cap in mid-March, leading to prices more than doubling in some regions.
Cooking oil cartel?
Industry analysts trace the problem to the nation’s palm oil industry being dominated by a small number of conglomerates. This has given rise to indications of cartel practices, where producers collude to fix prices and limit competition.
The government’s business competition watchdog, the KPPU, says it has found evidence of foul play behind the shortages and rising prices. At the end of February, police in North Sumatra province found at least three different warehouses stockpiling more than 71,000 liters (18,800 gallons) of cooking oil combined.
Two of the warehouses belonged to the country’s biggest convenience store chains, Alfamart and Indomaret. The third warehouse belonged to PT Salim Ivomas Pratama, which, like Indomaret, is affiliated with the Salim Group, one of Indonesia’s largest conglomerates.
“That case strengthens the indication of cartel [practices],” KPPU chairman Ukay Karyadi said. “Why are the indications getting stronger? Because the hoarding can be perceived as an effort by companies to influence the prices [of cooking oil] by holding off the stock from the market.”
The police, however, have dismissed the allegation, saying they haven’t found indications of coordinated efforts by producers to create scarcity.
But on March 28, the KPPU announced it had launched a formal investigation after questioning 44 parties, including producers, distributors, business associations, government officials, and retailers. Gopprera Panggabean, the KPPU’s director of investigations, said the investigation is expected to last for 60 days but could be extended if necessary.
Those found to be engaging in cartel practices face fines amounting to half of their profits arising from the violations, or 10% of their sales.
Food security failure
Four major industry players control nearly half of the domestic market for cooking oil, according to KPPU data from 2019. These producers have businesses throughout the supply chain, from oil palm plantations to processing mills to cooking oil refineries.
This gives them leverage to dictate the market, making the government appear powerless to control the price of cooking oil, according to Khudori, an agriculture expert with the Indonesian Political Economy Association (AEPI).
A coalition of five Indonesian NGOs, including palm oil industry watchdog Sawit Watch and Greenpeace Indonesia, said the ongoing cooking oil fiasco is a sign of the government’s inability to guarantee basic food security.
“This situation shows the Indonesian government’s failure in realizing food sovereignty as a part of human rights,” the coalition said in a press release. “The government shouldn’t bow down to the demand of the market and companies, including giving incentives to corporates.”
Fuel vs. food
One of those incentives that has long been controversial centers on the government’s biofuel program, which blends fossil diesel with palm-based biofuel.
According to the NGO coalition, palm oil is increasingly being channeled into the biofuel program at the expense of the edible oil market. In 2019, 5.83 million metric tons of crude palm oil was used in the biofuel program. A year later, the amount had increased to 7.23 million metric tons. During the same period, the amount of CPO used by the food industry declined from 9.86 million tons to 8.42 million tons in 2020.
Palm oil producers prefer to sell their CPO to biodiesel refiners, according to the NGO coalition, because of the incentives. The government levies a tariff on CPO exports and puts the money into a fund known as the BPDP-KS. Most of this money is then spent on subsidizing biofuel refiners to artificially lower the price of biodiesel at the pump, to make it more competitive with regular diesel.
This way, the government, through the BPDP-KS fund, is essentially guaranteeing producers a profit from selling their CPO to the biofuel industry, the coalition said.
“On the other hand, if their CPO is sold to cooking oil refineries, the businesses won’t receive incentives” like those from the biodiesel program, the coalition said.
More profitable to export
In response to the cooking oil shortage and persistently high prices, the government in early February issued a domestic market obligation policy, or DMO, requiring palm oil exporters to allocate 20% of their CPO for domestic use. In early March, the government increased the DMO to 30%.
But these moves only exacerbated the problem, according to Alexius Darmadi, chief executive of oleochemical producer PT Sumi Asih.
“This is because retailers were afraid to sell [cooking oil] at the abnormal price [set by the government],” he said in an online discussion on March 11.
Another factor is the current record-high price of CPO on the international market, now at about $1,600 per metric ton. For producers in Indonesia, this makes it more profitable to export CPO than to sell it domestically.
“It seems that businesses which do export are prioritizing the export market because this could increase their profits, even though they have cooking oil businesses,” KPPU director of economy Mulyawan Renamanggala said.
Disturbing the ‘oligopoly’
In mid-March, at the same time that it removed the price cap on cooking oil, the government also decided to end the DMO policy, on the assumption that producers would stop hoarding and supply would recover.
And while the scarcity has indeed started to ease, prices continue to stay high.
Mulyanto, a member of parliament from the opposition Prosperous Justice Party (PKS), said the government had essentially succumbed to pressure from the companies by revoking the price cap and the DMO. He said a handful of companies were in a position to dictate terms to the government because they wielded dominance over the cooking oil industry.
“They have enough power to control the production and prices at the market, which is an oligopoly,” Mulyanto said. “That’s why they didn’t want [their profits] to be disturbed, especially when the price of CPO was at its highest.”
He called on the government to overhaul the management of the cooking oil industry to make it more competitive. This could be done by revoking regulations that prevent entry into the market and providing incentive for new businesses, according to Mulyanto.
The NGO coalition said any serious scrutiny by the government must take in the entire palm oil supply chain to address the root causes of the problem.
“President Joko Widodo [should] immediately evaluate the palm oil industry completely from upstream to downstream in a transparent manner,” the coalition said. “This is to see if the scarcity and increases in cooking oil prices is due to inefficiency or due to irregular mechanisms in the supply chain of CPO and cooking oil.”
Banner image: Indonesian President Joko Widodo checks the stock of cooking oil at a minimarket in Yogyakarta, Indonesia, in March 2022. Image courtesy of the Indonesian Ministry of Communication and Information.
FEEDBACK: Use this form to send a message to the author of this post. If you want to post a public comment, you can do that at the bottom of the page.
For Indonesians, palm oil is everywhere but on supermarket shelves
Source: Trends News
0 Comments