Single Narative Palm OIL versi IPOSS 1 March 2023

Executive Summary:

• Indonesia currently as the biggest producers of palm oil in the world, contributes to around 64% to the world's total supply of palm oil in 2022. In the last two decades, Indonesia Palm Oil Industry development has been undergoing rapid development, henceforth altering the constellation of global vegetable oil competition.
• With the continuing of industrialization progress, palm oil has been transformed into a commodity that has a multidimensional role in supporting economic growth, with four major positive impact. First, generating jobs creations for millions of peoples along the supply chain. Second, the palm oil industry is one of the largest contributors to exports. Third, supporting energy security and bolstering renewable energy production. Forth, as a significant contributor to government revenues in the forms of non-tax revenues (PNBP).
• In the midst of a burgeoning uncertainty in global economy and heightening geopolitical risk, the major challenge is how the domestic policies primarily trade and industrial policies could strike the right balance among three overarching policies objectives, namely (i) securing food availability at affordable prices, at the same time supporting the progress of the biofuel production to secure energy security and promote renewable energy, (ii) thriving industrialization in a conducive environment to fulfil exports market primarily a wide range of higher added value product, and (iii) preserving the "sustainability" of biodiversity environment to gain the acceptability of Indonesian product in the global market.
• To achieve a balance of the above three overarching objectives continually, Indonesia should fulfil “the three key success factors”.
  • First, a supportive and conducive collaboration among stakeholders. Various policies delivered by each ministry, should be formulated and executed in a harmonious, consistent, and provide certainty for business activities, towards achieving a balance of the three mentioned overarching objectives.
  • Second, an effective supply management to support a sustainable palm oil industry. Boosting productivity of farmer plantations amid increasingly limited space for land expansion and accelerating the implementation of palm oil sustainability certification are two current policy challenges encountered on the supply side of the upstream industry.
  • Third, an effective demand management through three channel of industrialization namely (i) the ole-food industry, (ii) the oleo-chemical industry, and (iii) the biofuel industry. The palm oil industrialization progress has transformed Indonesia from the biggest CPO producer into the biggest producer of various high-value-added products, supporting job creation along the supply chain and demand creation for the upstream sector, and securing energy security as well as promoting renewable energy.
• Long term vision towards 2050: To reinforce the progress that has been achieved as well as to encounter future challenges, Indonesia need “a long term policy roadmap” entailing of several milestones and “strategic policies path” to achieve 2050 target. This roadmap as a strong footing to ensure that this strategic sector can play more important role in supporting a stronger, sustainable and inclusiveness of Indonesian economy.

I. Indonesia as Major Player in World Palm Market

The total amount of global vegetable oil production in 2022 are projected reaching 219.8 million tons of which Crude  Palm Oil (CPO) take a large part of 79.16 million tons. This more than the supply of other main vegetable oils, such as sunflower seeds which contributed 20.14 million tons, rapeseed 31.53 million tons and soybeans 61.9 million metric ton (USDA Forecast).

• The superiority of the palm oil compared to other competitors vegetable oil owing to the efficient use of land, henceforth generating high level of productivity. In 2022, the CPO productivity of large plantation in Indonesia are at average of 5 tons per hectare.
• Whereas, rapeseed oil productivity are only at 0.72 tons/ha, sunflower oil at 0.68 tons/ha, and soybean oil at 0.47 tons/ha. Thus, Palm oil has a 7–10 x higher productivity compared to those vegetable oil and should be viewed as the most promising commodity to fulfil the increasing demand for vegetable oil in the future. [caption id="attachment_2762" align="aligncenter" width="611"] Graph 1: Palm Oil Producers Countries[/caption]   [caption id="attachment_2765" align="aligncenter" width="595"] Graph 2: Vegetable Oil Productivity[/caption]
• Indonesia -as a country geographically located on the equator (blessed with plenty of sunshine throughout the year, hot temperatures, and high rainfall) - has plantations land reaching to 16.2 million in 2022. This has also brought Indonesia as the biggest producers of palm oil in the world, contributes to around 64% to the world's total supply of palm oil.

II. The Progress of Indonesia Palm Oil Industry Development

• In the last two decades, Indonesia Palm Oil Industry development in has been undergoing rapid development, hereafter changing the constellation of global vegetable oil competition.
• Domestic CPO production has accelerated, notably since Indonesia's success in nurturing the Large National Private Plantations (PBSN I, II, III) and the implementation of the oil palm plantation model thanks to a strong synergy between farmers and large corporations, known as Perkebunan Inti Rakyat (PIR) or NES (Nucleus Estate and Small holders).
• The successful NES trials (I-IV) were later expanded into various NES models include Special PIR and Local PIR (1980-1985), Transmigration PIR (1986-1995), and Co-operation (Koperasi) Credit PIR (1996). Through these various PIR scheme, palm oil plantations have spread out from North Sumatra-Aceh, to Riau, Kalimantan, and to other parts of Indonesia.
• Oil palm plantations briskly amplified from around 300 thousand hectares in 1980 to 11.6 million hectares in 2016. Concurrently, CPO production steadily rose from around 700 thousand tons in 1980 to 33.5 million tons in 2016 and to 51,2 million tons in 2022. The large part of production (around 60%) were directed to export market of which for the most part in the forms on Non-CPO product, portraying that a rousing progress of palm oil industrialization in Indonesia.

[caption id="" align="aligncenter" width="608"] Graph 3: CPO Production[/caption]   [caption id="attachment_2772" align="aligncenter" width="606"] Graph 4: Trade Balance[/caption]

• Since 2011 Indonesia has been promoting the industrialization of palm oil through three downstream channels, namely (i) the ole-food industry, (ii) the oleo-chemical industry, and (iii) the biofuel industry. The aim of industrialization was to enhance added value and reduce Indonesia's dependence on the world CPO market. The three channel will be explained in detail in the section IVc.
• The biofuel downstream channel was linked to the mandatory policies of B5 (2010), B10 (2012), B15 (2014), B20 (2016) and B35 (2023). This channel aims to reduce Indonesia's dependence on imported fossil fuels, as well as reducing emissions from fossil fuels, gradually replaced with renewable energy.
• The rapid growth of Indonesia's CPO production has changed the global CPO market landscape. In 2006 Indonesia overtook Malaysia as the largest CPO producer, supplying around 54% in the world's CPO market.

III. The strategic role of Palm Oil Industry in the Economy

• With the enduring of the industrialization progress, palm oil has been transformed into a commodity that has a multidimensional role in supporting economic growth. The industrialization progress has a broad impact to all layers of stakeholders along the supply chain, primarily farmers, intermediaries, entrepreneurs, exporters and the government revenue.
• During the covid-19 pandemic, the palm oil sector has also proven resilience and became a buffer for Indonesia's economic growth when almost all economic sectors experienced significant disruption.
• No less than four major positive impact on national economy worth to mention :
  1. First, generating jobs creations of 17,5 million people at the upstream, mid, and downstream industry along the supply chain. The small scale plantation currently employs 2.6 million people, the large plantation employs around 4.3 million people, and at the palm oil industry employs 5.2 million direct workers and 12 million indirect workers.
  2. Second, the palm oil industry is one of the largest contributors to exports, with total export value of USD 28,5 billion (2021) or  2% of Indonesia's total exports.
  3. Third, the progress of the palm oil industry plays a key role in supporting energy security and bolstering renewable energy production. Domestic consumption absorbs 40% of total CPO production (45 million tons as of 2022), of which 20% is consumed for Biofuel (B30).
  4. Forth, the increased of CPO exports and its derivative products favorably contributed to government revenues (supporting the government's fiscal position) particularly in the form of non-tax government revenues (PNBP).

IV. Key Success Factors to accomplish  a Sustainable Palm Oil Industry

Indonesia's success in progressing the palm oil industry has had a broad impact on the economy. However, in the midst of a burgeoning uncertain in global economy and heightening geopolitical risk which influence prices volatility in global commodity market, the major challenge is how the domestic policies primarily trade and industrial policies could strike the right balance among three overarching policies objective.

1. How to deliver policies that could secure food availability and affordability primarily public basic food such as cooking oil in domestic market?
2. How to deliver policies to continue flourishing Industrialization of palm oil in a conducive environment to fulfil exports market, mainly a wide range of higher added value product?
3. How to deliver industrialization of palm oil policies that could support "the sustainability" of long term economic growth while preserving the "sustainability" of biodiversity environment?

To achieve a balance of these three overarching goals continually, Indonesia should fulfil “the three key success factors”

1. A supportive and conducive collaboration among stakeholders. The eco-system in managing the palm oil industry in Indonesia involves a number of government agencies, namely, the ministry of plantations and agriculture, the ministry of trade, the ministry of environment, the ministry of finance, and BPDKS. Key players along the supply chain are mainly farmers, intermediaries, corporations and exporters.Various policies delivered by each ministry, should be formulated and executed in a harmonious, consistent, non-overlapping, and provide certainty for business activities, towards achieving a balance of the three mentioned overarching goals above.
2. An effective supply management to support a sustainable palm oil industry.
   • The upstream industry as the supplier of raw materials in the form of Fresh Fruit Bunches (TDS) yielded by farmer plantations needs to be boosted with policies executed "effectively" to uplift productivity (intensification). The productivity rate of farmer plantations has been deteriorating due to a wide range classical issues include expensive and low quality fertilizers, as well as palm trees that are increasingly unproductive due to being old. The government needs to improve “the effectiveness” of Palm Oil Replanting Program (PSR) to boost productivity, complemented with an Attached Partnerships Scheme (farmers and large plantation companies) through an inclusive closed loop model. Boosting productivity level from the current average at ~4 tonnes/Ha to ~6 tonnes/Ha are needed to fulfil the potential demand/consumption expected to reach 100 million tonnes in 2050. With the land coverage of farmer plantations currently at 6.38 million Ha, the Replanting Program should proceed with 255,197 hectare per year. In addition, fostering the application of certification of Sustainable Palm Oil are required to increase the acceptability of Indonesian export products in the global market.
   • In the middle part of the supply chain (midstream), policies need to ensure the sufficiency of CPO production for (i) food processing, especially to fulfil the availability of public basic food such as cooking oil at affordable prices, and (ii) bio-fuel production, especially Bio-diesel, which will continue to be increased in the next few years to support energy security and renewable energy use. For the purpose of stabilizing domestic cooking oil prices, export approval policies could be regulated based on the Commodity Balance Market Availability.  Currently, domestic supply policy has been supported with two Information System, namely the SIMIRAH (Ministry of Industry) which focuses on collecting data on domestic and export supplies. On the demand side, to monitor the fulfillment domestic consumption, the Ministry of Trade employ Information System called PUJLE that can provide an Early Warning System for domestic needs at normal condition, which range from 200 - 300 thousand tonnes per month. If needed, the Government could take decision to increase supply above normal conditions. Based on the commodity balance, a 1:9 export approval policy can be drawn up during normal domestic supply and 1:6 when an Early Warning arise. Meanwhile the role of State-Owned Enterprise (BUMN) is also important to ensure that the distribution of cooking oil is right on target.The two major challenges in supply side :Despite a notable progress in boosting supply, two major challenges need to be anticipated.
     1. First, policies to convert 3,2 million hectares of palm oil plantation land into forest area could cause Indonesia losing a significant palm oil production capacity and disrupting supply side to mid and down-stream industry, especially to fulfil the increasing consumption for food and biofuel production target. This policy need to be executed by sensibly taking into account not only securing biodiversity environment, but also all aspects primarily a long term economic growth and social dynamic.
     2. Second, a widespread negative perception both global and domestic concerning the harmful impact of CPO production and its derivatives on the bioecological environment. Considering the enormous benefits of the palm oil industry for the national economy primarily for job creation, all stakeholders should candidly synchronizing perception, while accelerating the implementation of sustainable palm oil certification.
3. An effective demand management through three channel of industrialization.The continuing success of industrialization via the three channel will change Indonesia from the biggest CPO producers to biggest high value added producers. That being said, the process of industrialization along the value chain will have forward and backward linkages impact in creating job opportunities for millions of people.
   1. The first channel is the process of down-streaming of the oleofood complex where industries produce 'refinery industrial products', 'intermediate oleofood products' and wide range of finished oleofood products including palm cooking oil, margarine, ice cream, creamer, cocoa butter/ specialty-fat and others;
   2. The second channel is the process of down-streaming oleochemical complex where industries processing "refinery industry products" to produce products ranging from basic oleochemicals/oleochemicals to finished products such as biosurfactant products (for example various detergent products, soaps, shampoos), biolubricant (for example biolubricant), and biomaterials (for example bioplastics). Since 2007 the government implemented a progressive export duty that provides incentives to promote the production downstream products, where export duties rate for upstream products were larger than downstream products. These policies were complemented with export levy implemented since 2015. At the present time,  the export reference price issued by the Ministry of Trade for every two weeks are used to determine export duty. Export duty also be borne by the palm oil importers so that it will not burden the industry, smallholder or government. BPDPKS program must also be supported by Export Tax (PE) with progressive rates corresponding to CPO prices movement.
   3. The third channel is the process of down-streaming of biofuel complex where industries processing refinery industry products to produce products ranging from biofuel to finished biofuel products, such as biodiesel, biogas, bio-premium, and bio-avtur. In this regard, in 2008 the government delivered a roadmap for Mandatory Biodiesel consumption which had effectively pushed business sector in palm oil industry to expand production capacity. Meanwhile, in order to boost mandatory biodiesel up to B-35, the government also implemented incentive scheme (from industry for industry)  via BPDPKS. Both policies mentioned above have effectively created an environment where palm oil industry at downstream stage are expected to increase production both for food availability and bio-fuel energy. Government could also push the Biodiesel program up to B40 and even up to hydrotreated vegetable oil (HVO) and sustainable aviation fuel (SAF). This initiative could help achieving renewable energy target in the national energy mix of 23% in 2025 and 31% in 2050.

V. Long Term Vision: Roadmap towards 2050 target

• The supply and demand management policies described above must be implemented coherently, through policies executed in a consistent, transparent, as well as fair and conducive for all stakeholders irrespective to political regime change.
• Long term vision towards 2050: To reinforce the progress that has been achieved as well as to encounter future challenges, Indonesia need “a long term policy roadmap” entailing of several milestones and “strategic policies path” to achieve 2050 target.
• The policy roadmap as a strong footing to ensure that the Palm Oil Industry can play more important role in supporting a stronger, sustainable and inclusiveness of Indonesian economy.

[caption id="attachment_2783" align="aligncenter" width="613"] Graph 5: Long Term Projection[/caption]   Appendix: