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NEW UPDATES Asean Affairs 3 September 2015  


The declining CPO price in the world market and the imposition of USD 50/tonne export levy on CPO starting 16 July 2015  has severely affected the Indonesian oil palm planters with the worst affected being the small holders and plasma farmers as they have the highest production cost.  

The imposition of the CPO levy has resulted in oversupply of CPO in the local Indonesian market, resulting in sharp drop in the local CPO price to below USD500/tonnes or Rp6,900,000/tonne. The average production cost including interest expenses for majority of the planters is in the region of Rp4,018,000     to Rp4,680,000 / tonne of CPO. This has resulted in the planters suffering heavy losses. In addition, there are not enough refinery in Indonesia to process the CPO.

The export of CPO have dropped to 20%  from 70% previously while the export of processed palm oil has increased to 75% from 30% previously. While on the surface, this may seem okay, in actual fact, the increase in the export of processed palm oil is at the expense of the oil palm planters who are suffering losses. This is not sustainable in the long term  as the affected oil palm planters will cut down on fertilizer application and upkeep and this will results in lower production of fresh fruit bunches (“FFB”) in the medium term.  Many planters will go bankrupt resulting in millions of job lost and social problem will arise.  

The oil palm refinery will also suffer later as the production of CPO will reduce drastically as many oil palm plantation have closed down.

This will seriously affect the US Dollar forex income for Indonesia as the export of CPO and processed palm oil drops due to the closure of many oil palm plantation. Hence, the Rupiah currency will depreciate further resulting in further inflation. The importation of fertilizer will become more expensive as the fertilizer is quoted in USD. This vicious cycle will continue and this will result in the collapse of the oil palm industry in Indonesia and Indonesia will no longer be the number one producer of CPO.  Foreign investors will also shy away from investment in Indonesia as the investment becomes not viable coupled with depreciation of Rupiah.

India, one of the major importer of CPO has implemented a 3 year plan to develop  2 million hectares of land in India with oil palm at a cost of USD 1.5 billion. (Newspaper article is enclosed). This will impact the CPO and proceed palm oil export from Indonesia in the future if many oil palm plantation in Indonesia closes down resulting in higher production cost for CPO and processed palm oil.

On the other hand, the planters in Malaysia will benefit as there is no export tax or levy for CPO.    

The imposition of the current export levy of USD50/tonne of CPO is not based on profit but on the tonnage regardless of the CPO price. Hence, the export levy was imposed  even when the farmers are suffering losses due to the low CPO price. This is definitely not sustainable. In the past, the other form of tax, i.e export tax was implemented only when the CPO price was above USD 750 per tonne and the planters are making profit.  Now the net CPO price is only USD 425 and dropping.  
Proceeds from these export levies which will be used to fund the government’s biodiesel (subsidy) program. While the idea is good but at the current low crude palm oil price and low CPO price, this is not viable. It is much cheaper to use 100% diesel based on petroleum.  We would like to highlight a few important factors and impact in relation to the levy imposed on CPO export:

1. Historical and Future Pricing of Crude Palm Oil

As shown below, the prices of Palm Oil since July 2014 has fall below threshold price of USD $750 per metric ton and it is expected to be low for the next 2 to 3 years due to low petroleum price.

Illustration 1: Palm Oil Monthly Price – US Dollars Per Metric Ton (July 2014 – July 2015)

2. Public welfare and reducing proverty

Indonesia being the biggest producer of palm oil in the world and the center of global production, palm oil in a priority for Indonesia’s economy planners. With millions of hectares of palm oil plantation, Indonesian government has come out with a scheme of “partnership” between the villagers with smallholders or companies. From a research done, smallholder farmers accounting for 40% of the total plantation, equivalent to almost 4.2 million hectares representing about 20,000 smallholders in Sumatra and Kalimantan in 2013 as reported by Oil Palm Smallholders Union (“SPKS”).

Independent smallholders own more than 3.1 million hectares of these farmland. These independent smallholders cultivate palm oil without outside help. On the contrary, plasma shareholders can access agriculture inputs such as seed stocks and fertilizers in lieu to their partnership scheme with the companies.

Those who are involved in this industry earn an adequate living. Even the smallholder partner or plasma farmer that owns a 2 hectares farm can enjoy the net income of Rp 3 million to Rp 4 million monthly when the currency is still at the level of  around Rp12,500 back in 2008.

It is also important to note that as of 2008 research done, 3.5 million households (about 14 million people) of farmers and employees making a living from oil palms (“on farm”). The number of those indirectly involved in the palm oil industry (“off farm”) is even much bigger. These are those people involve in the development of local suppliers, contractors (transportation, construction, etc) and village market workers.

As shown above, agriculture, forestry, hunting and fishing industry is contributing more than 35% or equivalent to about 41.2 million workers in the workforce in Indonesia comparing to other sectors back in year 2012.

However if the sentiment of the Rupiah currency continue to weaken and the levy starts to kick-in which will discourage the buildup of the USD currency, most of the smallholders and plasma farmer will not be able to sustain. We are all aware that fertilizer which is one of the most important element in oil palm plantation is an imported item. This will cause the price for the fertilizer to increase tremendously and the smallholders or plasma farmers will not be able to sustain this high jump in the cost. Hence this will result in a declining in the production of their Fresh Fruit Bunch (“FFB”) for the coming months. Once this happen, the whole country’s production will be declining and will not be able to meet the target of CPO supply as targeted by the Indonesia government and automatically the supply to the refinery for processing of the CPO will be effected. The table below will show the CPO target and the quantity need to meet the targeted processed palm oil.

indicates forecast Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture

Secondly, when price of CPO is controlled by local player since the levy is fix at a very high pricing, these smallholders and plasma farmers have no choice but to sell their FFB to the mill at a lower price since the CPO price in Indonesia is lower by at least USD $30 per metric ton (taking into consideration of levy imposed on CPO at USD $50 per metric ton).

These 40% of the plantation by the smallholders and plasma holders will slowly perish in less than 1 year due to this 2 major factors. Therefore the Indonesian government’s Economic Program of producing no less than 40 million tons of CPO with 10 to 12 million hectares will not be able to be realised.

3. Foreign exchange proceeds

In 2008, CPO production reached 28.5 million tons and generated more than USD$ 20.0 billion in foreign exchange from exports, making CPO the most valuable non-oil and gas export.

As reported by Indonesian Palm Oil Association (“GAPKI”), Indonesia’s export of CPO and processed palm oil for July 2015 fell 8% from the earlier month to 2.1 million tons which is only after 15 days the import levy was implemented.

By : Arief Poyuono.SE.Mi.KOM
Vice Chairman Of GERINDRA Party

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This year in Thailand-what next?

AseanAffairs   04 January 2011
By David Swartzentruber      

It is commonplace in journalism to write two types of articles at the transition point between the year that has passed and the New Year. As this writer qualifies as an “old hand” in observing Thailand with a track record dating back 14 years, it is time take a shot at what may unfold in Thailand in 2011.

The first issue that can’t be answered is the health of Thailand’s beloved King Bhumibol, who is now 83 years old. He is the world's longest reigning monarch, but elaborate birthday celebrations in December failed to mask concern over his health. More






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