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Indonesia restricts palm oil in heavy hand on exports

Australian Financial Review - February 9, 2022

Emma Connors and Natalia Santi, Singapore/Jakarta – Indonesian President Joko Widodo's government started the year with a ban on coal exports and now it has ordered palm oil producers to reserve a portion for domestic use, as it battles a hike in the cost of cooking oil on supermarket shelves.

Indonesia's palm oil growers say the high cost of fertiliser will affect yields for the rest of this year which, with more expensive imports of wheat and corn, is likely to see ongoing government intervention to combat rising prices.

Inflation is on the march in Indonesia, though it is coming from a low base. Core inflation was up 2.2 per cent year-on-year in January with food prices up 3.4 per cent. Most economists expect Bank Indonesia to start raising its benchmark rate from 3.5 per cent in the second half of this year, sooner if the rupiah loses purchasing power when the US Federal Reserve moves on rates.

The Indonesian government has opted not to wait. Its order to reserve oil, at a lower-than-market price, is among measures popular with voters, but farmers are worried they will lose out while exporters scramble to meet the new reserve requirements. The government has also limited consumer purchases to two litres of oil per person per day and capped the retail price.

CGS-CIMB Research reports that while Indonesia's palm oil exports grew only 0.6 per cent in volume last year, the value of those exports climbed 52 per cent to $US35 billion ($48.8 billion), "mainly due to high CPO prices that have soared 64 per cent year-on-year".

Nisrina Nafisah from Jakarta-based Centre for Indonesian Policy Studies said the government's interventions could "harm not only producers but also farmers, as well as exacerbate the scarcity of cooking oil supply if crude palm oil prices and production costs remain high".

Anwita Basu, an Asia analyst at Fitch Solutions, said it was heartening to see the government was focused on inflation control, meaning fiscal policy was aligned with monetary policy. However, she cautioned that such moves could add to budget pressures. "The fiscal risks are high given Indonesia's track record."

Researchers say it will take at least a month to see if the export controls bring down domestic prices. Meanwhile, cooking oil has become hard to find for some across the archipelago nation, the world's biggest producer and exporter of palm oil.

"Many of the stores near me don't have any oil on their shelves, even though sales are limited to two litres," said Ika Atikah, a housewife in East Jakarta. "You just have to check each day."

The situation is unlikely to improve. World Bank data suggests the price of urea fertiliser increased by $US265 a tonne in January 2021 to $US890 a tonne by the end of the year. This meant farmers used less, so yields will be down this year, the Indonesian Palm Oil Farmers Association has warned. It said the price of non-subsidised fertilisers was still going up.

Ammonia, the key ingredient in the urea fertilisers used around Indonesia, is made from natural gas so when natural gas prices spiral upwards, as happened last year, the prices of fertilisers also go up.

Global energy costs remain high, putting further pressure on inflation, as will higher prices for key imports such as wheat, used to make noodles, and corn, used to feed livestock.

"Looking ahead, we expect to see the same dynamic playing out in the next few months – inflationary pressures banging on the door, and the government valiantly trying to keep them at bay," BCA's economists wrote in a recent research note.

Source: https://www.afr.com/world/asia/indonesia-restricts-palm-oil-in-heavy-hand-on-exports-20220208-p59uu