- Indonesia is the world’s largest producer of palm oil, but has been hit in recent months by tight supplies and high vegetable oil prices.
- The country’s trade competition regulator is reporting 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 biofuels program rather than cooking oil refiners.
- Parliament has called hearings into the matter, while the competition watchdog has launched a formal investigation.
JAKARTA — Cartel practices have been blamed for cooking oil shortages at the world’s top palm oil producer — but government policies seen as spoiling the industry have also come under fire careful examination.
Since last October, Indonesian households have been experiencing severe shortages of cooking oil. Even when supplies were available, prices were often multiples of what the product would usually cost at retail.
The shortage has prompted widespread complaints from ordinary citizens and politicians, with parliament launching hearings into why Indonesia, which produces more than half of the world’s crude palm oil, is by far the main source of edible vegetable oil, is running out.
“It means that there are parties that play [the market] in this cooking oil issue, including determining retail prices for cooking oil in the marketplace,” noted Ahmad Muzani, vice-president of the People’s Consultative Assembly (MPR).
As an interim measure, the government capped the price of palm oil at retail outlets at 14,000 rupees (about $1) per liter in late January. But it removed the cap in mid-March, which more than doubled prices in some areas.
Cooking oil cartel?
Industry analysts attribute the problem to the fact that the domestic palm oil industry is 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 trade competition watchdog, the KPPU, says it has found evidence of foul play behind the shortages and rising prices. At the end of February, the police of the province of North Sumatra found at least three different warehouses storing over 71,000 liters (18,800 gallons) of cooking oil combined.
Two of the warehouses were owned by the country’s largest 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.
“This case reinforces the indication of a cartel [practices]», the president of the KPPU, Ukay Karyadi noted. “Why are the indications getting stronger? Because hoarding can be seen as an effort by companies to influence prices [of cooking oil] by withholding market actions.
The police, however, rejected the allegation, saying they found no indication of coordinated efforts by producers to create a shortage.
But on March 28, the KPPU announcement it had launched a formal investigation after interviewing 44 parties, including producers, distributors, trade associations, government officials and retailers. Gopprera Panggabean, director of investigations at KPPU, said the investigation is expected to last 60 days but could be extended if necessary.
Those who engage in cartel practices are subject to fines amounting to half of their profits resulting from the violations, or 10% of their sales.
Food security failure
Four major industry players control nearly half of the domestic cooking oil market, according to KPPU data from 2019. These producers have businesses all along the supply chain, from palm oil plantations to processing plants 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 government to guarantee basic food security.
“This situation shows the failure of the Indonesian government to realize food sovereignty within the framework of human rights,” the coalition said in a statement. Press release. “Government should not pander to market and business demand, including giving incentives to businesses.”
Fuel vs Food
One such incentive that has long been controversial is the government’s biofuels program, which blends fossil diesel with palm-based biofuel.
According to the NGO coalition, palm oil is increasingly channeled into the biofuels program at the expense of the edible oil market. In 2019, 5.83 million metric tons of crude palm oil was used in the biofuels program. A year later, the amount had risen to 7.23 million metric tons. During the same period, the amount of CPO used by the food industry increased from 9.86 million tonnes to 8.42 million tonnes 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 places the money in a fund known as 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.
In this way, the government, through the BPDP-KS fund, essentially guarantees producers a profit from the sale of their CPO to the biofuel industry, the coalition said.
“On the other hand, if their CPO is sold to cooking oil refineries, the companies will not receive incentives” like those in the biodiesel program, the coalition said.
More profitable to export
In response to the shortage of cooking oil and persistently high prices, the government issued a Domestic Market Obligation, or DMO, policy in early February requiring palm oil exporters to allocate 20% of their CPO to domestic use. In early March, the government increased the DMO to 30%.
But these measures have only exacerbated the problem, according to Alexius Darmadi, managing director of oleochemical producer PT Sumi Asih.
“It’s because retailers were afraid to sell [cooking oil] at abnormal price [set by the government]he said in an online chat on March 11.
Another factor is the current record price of CPO in the international market, now at around $1,600 per metric ton. For Indonesian producers, it is therefore more profitable to export CPO than to sell it on the domestic market.
“It seems that the exporting companies are prioritizing the export market as it might boost their profits, even if they have cooking oil businesses,” KPPU director of economics Mulyawan Renamanggala said. noted.
Destabilizing the “oligopoly”
In mid-March, along with removing the price cap on cooking oil, the government also decided ending the DPO policy, assuming producers would stop hoarding and supply would recover.
And while scarcity has indeed started to calm downprices remain high.
Mulyanto, an MP from the opposition Prosperous Justice Party (PKS), said the government had essentially succumbed to corporate pressure by repealing the price cap and DMO. He said a handful of companies are able to dictate their terms to the government because they have dominance over the cooking oil industry.
“They have enough power to control production and prices in the market, which is an oligopoly,” Mulyanto said. noted. “That’s why they didn’t want [their profits] be bothered, especially when the CPO price was at its highest.
He called the government to review the management of the cooking oil industry to make it more competitive. This could be done by repealing regulations that prevent market entry and providing incentives for new businesses, according to Mulyanto.
The NGO coalition said any serious government review must look across the entire palm oil supply chain to tackle the root causes of the problem.
“President Joko Widodo [should] immediately assess the palm oil industry from upstream to downstream in a transparent way,” the coalition said. “The question is whether the scarcity and rising cooking oil prices are due to inefficiency or irregular mechanisms in the CPO and cooking oil supply chain.”
Banner image: Indonesian President Joko Widodo checks the stock of cooking oil at a convenience store in Yogyakarta, Indonesia in March 2022. Image courtesy of the Indonesian Ministry of Communication and Information.
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