Food protectionism and triple taxation in palm oil

Food protectionism and triple taxation in palm oil

Palmoilmagazine, Edi Suhardi, Sustainable Palm Oil Analysts.

Palmoilmagazine, Jakarta - Domestic palm oil prices are still way below the all-time highs of Rp 3,500 (24 US cents) to Rp 4,000 per kilogram even more than two weeks after the export ban was lifted on May 23. Oil palm smallholders have been crying out because their fresh fruit bunches (FFBs) fetch less than 50 percent of what their Malaysian counterparts enjoy.

Food protectionism somehow causes loss-loss situations. Countries that limit or restrict the export of their food commodities may look happy as the domestic supply is secured at low prices. But at the expense of the trading system. In the short term, the cost of the antimarket measure does not appear in the state budget as food subsidies can be avoided. But there are big opportunities lost at every value chain level, including the loss of potential government income.

This short-sighted strategy only encourages speculation, domestically and internationally. International trade is an essential component of food security. Restricting the movement of foods exacerbates tensions, maintains a chronic shortage of supply and can cause imported and domestic inflationary spirals without solving the problems.

Food protectionism through the imposition of Domestic Market Obligation (DMO) at the fixed domestic price obligation (DPO) is simply another face of rationing. Rationing is the practice of controlling the free distribution of a good or service to cope with scarcity or rising prices.

Examples from the regulated domestic prices of gasoline and diesel oil showed that restricting the market of basic necessities at the government-fixed low prices usually causes long lines of consumers who tend to buy more than what they actually need. Down the line this causes government subsidy spending to balloon. Rationing also creates black markets and unethical practices as many try to evade the restrictions.

Now we can see that Indonesia is harvesting what it has sown with the series of emotionally charged policies it introduced in January to stabilize the steeply rising domestic cooking oil price since late 2021.

The total ban on palm oil products slapped on April 28 has caused the storage tanks of most palm oil companies to become overflown, consequently pushing down the price of smallholders' FFBs by more than 50 percent as most big companies stopped buying new basic materials.

The export ban was lifted on May 23, but up until last week, not a single shipment had left the country because the new policy was followed up with another bundle of excessive red tape for export licenses.

The government should have realized the devastating impact before launching the total export ban in late April because the country, the world’s largest palm oil producer with a national production of 51 million tons in 2021, uses only one-third of its output. The export of palm oil and its derivatives usually amounted to 3 million tons a month.

New regulations require all palm oil companies intending to export palm oil and its derivatives to be registered on three electronic application platforms—the Indonesian National Single Window, the Bulk Cooking Oil Information Platform and the National Industry Information platform.

Companies certainly need some time to digest all the technical details of the regulations on the export license and the DMO. As of last week, issued export licenses covered only 1 million tons.

Then the government last week suddenly introduced a new policy. Companies should not have to implement the DMO and should not go through the arduous export red tape if they are willing to pay $200/ton in an additional levy (windfall tax) on top of the $288 levy already charged and the $200 export tax. This is triple taxation that burdens all parties.

With the total export levy and tax of $668, and current price of $1,500 per ton, the effective tax rate is about 45 percent. While in Malaysia, the government has reduced the export tax from 8 percent to 4 percent.

The government introduced the express export procedure apparently after it became aware of the great loss of income inflicted on the estimated 2.7 million oil palm farmers, not to mention the loss of foreign exchange earnings and the risks of the Indonesian market share being eroded by other suppliers, notably those of Malaysia, the world’s second-largest producer.

The Finance Ministry announced that export tax earnings for May fell by almost 80 percent, and we expect the total opportunity loss from May's export levy and tax to be close to $1 billion. If we include the income losses of smallholders, companies and government and the risk of Indonesian market shares being eroded by other competitors, especially Malaysia, the world’s second-largest producer, the devastating damages will be quite huge.

President Jokowi himself has revealed that he had received a call from the prime minister of a palm oil-importing country regarding the export ban. That a minister from Pakistan, our third top buyer, visited Jakarta and met with key ministers only highlighted the shocks to our close friends.

The government expects the new export procedure, which will be used only as a contingency measure to flush out stocks from storage tanks, will be able to issue export permits for a total of 3 million tons before the end of this month.

We have to wait to see whether the express export procedure, which imposes $200/ton in the additional levy, will be able to raise smallholders’ FFB prices from the range of Rp 1,500-2,000 per kg now, to the government target of Rp 2,500-3,500. Before the export ban was imposed in April the FFB prices ranged from Rp 3,000 to Rp 3,500/kg.

A simple calculation will show that in determining their purchase prices from smallholders, companies certainly will first deduct the $668 (total levies and export tax} from the international palm oil prices, which at present stand at around $1,500/ton. Hence, the domestic palm oil price will be around $850-900/ton, which is still slightly higher than the average international price of $750 in 2020 before it rose sharply to over $1,100 in the second semester of 2021.

However, the high CPO price also comes with rising fertilizer prices since late 2021, in line with the natural gas price rise. Fertilizers now account for almost 50 percent of palm oil production costs. But if the $850/ton domestic CPO price is converted into rupiah for setting the FFB price for farmers the result is still less than half of the government price target.

Therefore, for the benefit of all parties, market-distortion measures should be avoided and instead it is better to use fiscal-friendly measures to stabilize the prices of staple food as cooking oil as they are easier to manage than having to fight the market mechanism.

As holder of the Group of 20 (G20) presidency, Indonesia should work with others to combat soaring food prices, ease export restrictions worldwide and give strong signals to mitigate speculation. Better international cooperation would succeed in regulating supply and demand.


Agam Fatchurrochman and Edi Suhardi

The writers are sustainable palm oil analysts.


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