Jakarta – Indonesia's palm oil industry is urging authorities to ease export restrictions and taxes so it can sell produce that risks going to waste, as an upcoming harvest season is likely to keep inventories at full capacity.
Easing export restrictions by the world's biggest palm oil producer will further depress prices which have dropped nearly half since late April to their lowest in over a year.
Indonesian producers have been struggling with high inventories since the country imposed a three-week export embargo through May 23 to reduce domestic cooking oil prices.
That caused palm prices to spike and wiped about $2 billion off export earnings for Southeast Asia's largest economy.
New rules on mandatory local sales – known as domestic market obligation (DMO) – have since kept produce at home and forced the closure of mills unable to process oil with storage full. The harvest season will only exacerbate the problem.
"I've proposed the DMO to be removed. We don't need DMO, it's very hard to calculate," said the head of industry group Indonesia Palm Oil Board, Sahat Sinaga. DMO is redundant as the domestic market is oversupplied with cooking oil, Sinaga said.
Cooking oil prices have fallen below the government's target in Java and Bali but are above elsewhere, official data showed.
Wary of another policy change, exporters wait until they have export permits, which are tied to the DMO, before securing cargo ships, themselves in short supply due to a global shipping crunch, said Sinaga, who also called for cuts to export taxes.
Farmers have also complained that limited purchases by mills have left palm fruit unsold and degrading in quality and value by the day. Some have even stopped harvesting due to low prices.
Almost a million tonnes of fresh fruit bunches were left to rot in May and June, said Gulat Manurung, chairman of farmers group APKASINDO.
Domestic palm oil inventory is near full capacity of about 7 million tonnes, the highest in seven years, where it will remain in coming months unless exports normalise, an industry source said, requesting anonymity due to the sensitivity of the issue.
Customs data showed Indonesia shipped 2.35 million tonnes of palm oil products over May 23 to July 12, versus its typical export volume of 3 million tonnes a month before the ban.
Further pressuring inventories, Indonesia is set to enter peak harvest season in August to September when it typically produces 4.5 million tonnes of crude palm oil a month, a third of which is usually used locally, the source said.
Authorities have tried to clear stocks by cutting export taxes and launching shipment acceleration programmes. They also plan to increase the mandatory palm oil mix in biodiesel, from 30 per cent to 35 per cent starting July 20 to absorb some of the excess.
Industry sources have said unless taxes are lowered and local sales rules removed, the situation will not change.
The government has said DMO is not the problem. It has established an export quota of 5.4 million tonnes based on DMO but less than half has been used, said a spokesperson at the Coordinating Maritime and Investment Ministry.
Still, it is considering temporary incentives to alleviate the inventory crisis, Deputy Finance Minister Suahasil Nazara said without elaborating.
Authorities face complex trade-offs if they cut taxes, said James Fry, founder of agricultural commodities consultancy LMC International, pointing to the government's use of proceeds from palm oil export taxes to subsidise its biodiesel mandate.
"If local biodiesel demand is reduced, exports of palm oil will inevitably be higher and this would hit world market prices, which would of course affect all Indonesian palm oil producers and reduce the country's export earnings," Fry said.