Palm oil production to rise in Indonesia

Improved weather conditions and expanded acreage should help Indonesia’s palm oil industry rebound from a weak harvest in 2016, though projections of higher output may put downward pressure on prices and have prompted calls for increased domestic consumption.

Stronger yields are expected in 2017 for Indonesia – the world’s largest producer of palm oil, at 34 million tonnes last season, or 54 per cent of global supply, according to the US Department of Agriculture – although some effects of last year’s El Niño weather phenomenon, such as drought conditions in many areas, are still being felt.

Industry projections put crude palm oil (CPO) production for this year in the range of 33 million to 35 million tonnes as output increases in the second half – the upper end of the forecast bracket puts CPO yields some 10 per cent higher than last year.

According to revised data issued by the Indonesian Palm Oil Producers Association in late March, CPO production in 2016 rose by 10 per cent to 32.5 million tonnes, above earlier estimates of 30 million to 32 million tonnes.

The new sector data and forecast follow a marginal fall in export volume last year, though earnings actually rose due to a global production shortfall that lifted prices.

Last year Indonesia’s foreign sales from CPO rose by eight per cent to US$ 17.8 billion, despite a two per cent dip in volume to 25.7 million tonnes, according to the Indonesian Oil Palm Estate Fund. In dollar terms, this meant palm oil accounted for 13.8 per cent of Indonesia’s non- oil exports that year.

Pricing fluctuations

Much of this increase is down to the behaviour of prices, which rose from US$ 558 to US$ 789 per tonne over the course of 2016 – levels the fund warned could not be sustained long term without harming palm oil’s competitiveness against other vegetable oils.

Expectations of increased production and price competition have seen Indonesian CPO prices ease through the first quarter of 2017 and into the second – prices fell to US$ 722 a tonne in early March, before recovering somewhat to US$ 765 later that month.

Any upticks are likely to be short-lived, however, due to higher levels of production and as prices track declines in other vegetable oils, according to Commtrendz, a local consultancy dealing in commodity futures and foreign exchange.

Boost from biofuels

The sector is meanwhi le seeking to boost local demand for biofuel, which would provide a steady market to help hedge any international fluctuations, according to Arif Rachmat, CEO of oil and rubber plantation operator Triputra Agro Persada.

Industry leaders have been in close consultation with senior government of ficials for an increase in palm oil consumption through “public service obligation” ( PSO) – subsidised biofuel sold through state outlets – while also looking to increase sales of biofuel to private retailers.

“We are aiming to increase domestic consumption, hence the importance of non- PSO,” Rachmat told OBG. “The target is for domestic consumption to double, but if we can help it rise from 3.5 million to five million tonnes, that would be a successful milestone for non-PSO.”

Given forecasts that prices may fall this year, Arif said higher levels of domestic consumption via greater take-up of non-PSO were vital to ensure pricing stability going forward.

Troubled EU waters

Calls for measures to lift domestic consumption of CPO have increased in importance following a threat to Indonesia’s exports to Europe.

On April 4 the European Parliament approved a resolution requiring that all CPO oil imports meet international sustainability standards by 2020. The resolution also called for a ban on all imports of biodiesel utilising palm oil. If imposed, the restrictions could dampen Indonesia’s CPO export trade with the EU, which currently amounts to more than 3m tonnes annually.

To reduce this risk, the Indonesian government is looking to boost usage of biofuels in the local market to soak up output previously exported to the EU, Andi Amran Sulaiman, minister of agriculture, said in mid-April.

This Indonesia economic update was produced by Oxford Business Group.