Harnessing the potential of palm oil to realize the vision of a high-income country

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Chairman of the Indonesian Palm Oil Association (IPOA), Eddy Martono.

PALMOILMAGAZINE, JAKARTA – Palm oil stands out among Indonesia’s perennial crops for its crucial role in the nation’s economy. It significantly contributes to income generation, foreign exchange earnings, regional development, poverty alleviation in rural areas, employment, and provides a sustainable source of numerous consumer goods over the long term.

Even more promising is palm oil’s potential role as a sustainable biofuel source. President-elect Prabowo Subianto’s campaign pledge to accelerate Indonesia’s renewable energy transition includes plans to boost biofuel production by upgrading biodiesel from B35 to B50 using palm oil.

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Currently, palm oil is Indonesia’s second-largest non-oil export, following coal, which earned $30.3 billion last year, or 12 percent of total exports. As the world’s largest producer of palm oil, with a total output of 55 million tonnes in 2023, Indonesia supplied 54 percent of the global palm oil market and one-third of the total global vegetable oil supply. Palm oil now accounts for more than 45 percent of global vegetable oil consumption.

Also Read: Prabowo-Gibran Vision: Empowering Smallholders to Achieve Global Leadership in Green Energy

Still more encouraging amid climate change, is that palm oil is the most productive among all vegetable oils. In addition to their exceptional productivity, oil palm trees also demand much less work and production inputs per unit than other oil crops. Therefore, palm oil is by far the cheapest oil to produce.

This commodity contributes significantly to poverty alleviation in rural areas because 40 percent of the estimated  16.5 million hectares of oil palm estates across the country are owned by 6.7 million smallholder farmers, and the palm oil industry directly and indirectly employs 16 million people.

But the biggest concern over Prabowo’s ambitious biodiesel production program is its impact on the environment, because even now, many green NGOs have been blaming the commodity as one of the main causes of deforestation.

Another concern is the likely fierce competition between the demand for food and fuel, which could cause inflation pressures. Consumption of palm oil for biodiesel in Indonesia  last  year amounted to 23.2 million tonnes, 46 percent of total national consumption, with food making up 44 percent and oleochemicals 10 percent.

Also Read: Plasma Smallholders and Stakeholders Meet with Prabowo Subianto to Boost Welfare and Productivity

However, we still think the plan to double palm oil production is still environmentally, technically, and commercially feasible because there are still large areas outside the natural forests that are fit for oil palm estate expansion. This crop also is most suitable and at best to be cultivated in the regions around the equator such as Indonesia.

The global market will never be saturated even if Indonesian production, for example, is doubled to over 100 million tonnes a year because the demand for palm oil as a source of food and biofuel will continue to increase.  Palm oil is so versatile that it is found in more than half of the packaged consumer goods in supermarkets around the world, according to the World Wide Fund for Nature (WWF).

There are, however, several key prerequisites to realizing the ambitious plan. The program should be based on a long-term development roadmap, which requires better governance,  expanded research and development to produce high-yield seeds, integrated downstream and upstream processing policy, and environmental, social, and governance (ESG) sustainability standards.

The first is to create a regulatory and policy framework conducive to the sustainable growth of palm oil.  It is essential that the government strengthen policy certainty by revisiting all laws and regulations related to palm oil and to amend those detrimental to the palm oil industry.

The industry is now facing self-imposed governance issues, particularly related to misguided policies in the upstream and downstream processing industries and market intervention. Despite its vital role, the palm oil industry has been suffering from a series of stringent antimarket policies such as export quotas, a domestic market obligation, and fixed prices introduced since early 2022  to stabilize the price of cooking oil at the government fixed level after the prices of palm oil skyrocketed due to the massive disruption in the global supply of edible oils.

The policies regulating the use of palm oil for a range of purposes, notably biodiesel and cooking oil for both domestic consumption and exports, must be aligned and synchronized with national production capacity to prevent unnecessary competition. In this context,  the production target for biodiesels using crude palm oil (CPO) should be examined thoroughly to prevent disruption to palm oil supplies for other domestic and export purposes.

The government must also improve its institutionalization and governance of palm oil by reducing red tape and strengthening business predictability. There should be good ministerial coordination in making the long-term palm oil development road map because, without good coordination, the government can’t design an integrated development policy for such an important industry.

One of the most important elements of the road map should be the removal of overlapping regulations and institutions, which have been the main cause of the rising wave of land conflicts with indigenous communities,  deforestation, and other practices of reckless natural resource extraction.

There are now nine national agencies that directly and indirectly govern the palm oil industry. But coherent policies can be made only if all policies related to the palm oil industry are formulated and implemented by a single government agency.

Lastly, palm oil production growth must inevitably be sustained through both concerted efforts to increase tree yield (productivity) and expand estates in adherence with applicable sustainability standards.  The government should give incentives to palm oil companies to expand their research and development to innovate more high-yield seeds.

There are now more than  10 certified oil palm seed producers already operating across the country.  Research from several big plantation companies has led to the development of seeds that can double the average yield up to eight or even nine tonnes per ha.  Such positive outcomes must be cascaded to and used to improve smallholders’  productivity and the overall national palm oil production.

The replanting of smallholder plantations with high-yield seeds should be accelerated with funds from the Oil Palm Plantation Development Fund (BPDPKS). If the estimated 6.5 million ha of smallholder plantations can be replanted with high yields, the program to double Indonesian production to 100 million tonnes would not need vast estate expansion.

By: Eddy Martono

Chairman of the Indonesian Palm Oil Association (GAPKI).

The views expressed in this article are personal

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