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Analysis: Govt adopts another ill policy over scarcity of cheap cooking oil

Jakarta Post - February 15, 2023

Tenggara Strategics, Jakarta – The government has decided to increase the portion of domestic market obligation (DMO) of crude palm oil (CPO), the raw material of cooking oil, and slow down CPO exports to reign in the recent hike of government-sponsored, simple-packaged cooking oil Minyakita. The antimarket policy has irked industry players as it will again punish them more.

Minyakita prices have increased from the government-set retail price of Rp 14,000 (about US$1) a kilo to as high as Rp 20,000 a kilo. In some places, Minyakita even disappear from retail shelves. The government has attributed Minyakita's price increase and scarcity to its popularity among consumers, including those of the middle class, because of its good quality but much cheaper prices, when compared with premium brands of cooking oil. Minyakita is actually intended for poor people and lower-middle class customers.

Not only that, Trade Minister Zulkifli Hasan recently found 515 tonnes of Minyakita hoarded in a warehouse belonging to PT Bina Karya Prima (BKP), the largest producer of Minyakita. Coordinating Maritime Affairs and Investment Minister Luhut Binsar Pandjaitan was furious with the finding and told the National Police's food task force to take action against BKP. If the company was found guilty, Luhut said the government would "close down" the company.

Luhut, tasked by President Joko "Jokowi" Widodo to handle the cooking oil debacle, then convened an emergency coordination meeting with the trade minister, the police's food task force and the industry minister to devise a policy to prevent future supply shocks of Minyakita, especially during the Muslim fasting month of Ramadan and Idul Fitri festival.

Luhut said after the meeting that all those in attendance agreed to increase CPO allocations for domestic market by 50 percent from 300,000 to 450,000 tonnes per day. To ensure enough domestic supply of CPO, Luhut told the trade minister to use the Indonesia National Single Window to hold up 66 percent of CPO export licenses until April, when Idul Fitri celebration occurred. Minister Zulkifli Hasan added that the government would limit the purchase of Minyakita to 5 kilos per person, while those buying more than that would be required to show their ID cards, and still they would be limited to 10 kilos each.

The government's antimarket policy of increasing the DMO and slowing down exports was met with criticism from the Indonesian Palm Oil Council (DMSI). DMSI acting chairman Sahat Sinaga suggested that the government assigned state-owned food companies to take over the production of Minyakita from private companies and assign the State Logistics Agency (Bulog) to take over the distribution of Minyakita to solve the current cooking oil fiasco.

Sahat believed that if the production and distribution of Minyakita were carried out by state-owned companies, there would no longer be price fluctuations or scarcity of Minyakita, and no more hassle for customers having to show their ID cards just to buy Minyakita. When the government is in control of Minyakita, it would not need to adopt the DMO or export restrictions on CPO.

What's more

Antimarket policies on cooking oil:

  • January 2022: Trade Ministry Regulation No. 1/2022 (replaced by Trade Ministry Regulation No. 6/2022) sets retail price ceiling of cooking oil at Rp 14,000 per liter. The Indonesian Palm Oil Estate Fund (BPDPKS) is tasked to pay price difference to producers
  • February 2022: Trade Ministry Regulation No. 6/2022 (replaced by Trade Ministry Regulation No. 11/2022) introduces different price ceilings of cooking oil: bulk at Rp 11,500 per liter, simple packaging Rp 13,500 per liter, premium packaging Rp 14,000 per liter.
  • February 2022: Trade Ministry Regulation No. 129/2022 (replaced by Trade Ministry Regulation No. 170/2022) introduces the DMO.
  • March 2022: Industry Ministry Regulation No. 8/2022 (replaced by Industry Ministry Regulation No. 26/2022) on SIMIRAH platform to monitor distribution of cooking oil.
  • April 2022: The government provides cash transfer to 20.65 million poor households and 2.5 million street hawkers, each receiving a one-time transfer of Rp 300,000.
  • April 2022: Trade Ministry Regulation No. 22/2022 suspends exports of CPO and its derivatives.
  • May 2022: Trade Ministry Regulation No. 30/2022 revokes Trade Ministry Regulation No. 22/2022 on CPO export ban.
  • May 2022: Trade Ministry Regulation No. 33/2022 (replaced by Trade Ministry Regulation no. 49/2022) reintroduces DMO after export ban is lifted.
  • June 2022: Zulkilfi Hasan replaces Mohammad Lutfi as trade minister.

What we've heard

A source at the Trade Ministry said top officials had begun to worry two months ago about diminishing cooking oil stocks in a number of regions. Some even said the current issue could be far worse than the price spike in early 2022.

"There are concerns that the shortage of cooking oil could be worse than last year," said the government source.

This concern was behind the Trade Ministry's rush to change the DMO ratio from 1:9 to 1:6. "We are still traumatized by the loss of cooking oil at Posar last year," said a source at the ministry.

With the new ratio, producers are required to supply 1 ton of crude palm oil domestically for every 6 million tons they export.

However, high-ranking officials from the Trade Ministry are aware that the policy of adding to the DMO does not necessarily increase the stock of DMO oil.

This is because the amount of CPO exported has also decreased drastically. With the ratio set by the government, the lower the amount exports, the smaller the obligation of businesses to supply CPO for DMO needs.

In addition to falling prices on the global market, palm oil businesses are still subject to export duties and export levies that are quite large if they continue to export CPO. That is why, from the point of view of entrepreneurs, CPO exports are not profitable for their business. So they prefer to distribute it to biodiesel plants. Moreover, the CPO price for biodiesel is guaranteed by the Oil Palm Plantation Fund Management Agency (BPDPKS).

Another source said that around 18 crude palm oil producing factories had begun changing distribution, moving their CPO to biodiesel. They were even said to have put the brakes supplying their DMO since last December.

It has also been known for a long time that the government will start implementing the B35 program this year. It has long been reported that CPO producers are close to the Coordinating Economic Minister Airlangga Hartarto. His ministry was the one tasked by the government to run the biodiesel program. With mandatory B35, the need for palm oil to be used as raw material for biodiesel has also increased.

Even though the Coordinating Maritime Affairs and Investment Minister Luhut Pandjaitan has asked 38 cooking oil producers to increase their DMO allotments, many people are not convinced that this policy is effective at overcoming the shortage of DMO oil.

"So far, the government has had difficulty supervising DMOs," said a former trade ministry employee.

He said producers had been taking advantage of every loophole to make a profit by selling CPO to other programs that could pay more. The big producers who controlled the palm oil industry from the upstream to downstream were the ones who benefitted most.

The source said supply chains from intermediaries to downstream industries were in the hands of large groups such as Wilmar, Musim Mas and Sinar Mas.

"The lower the players, the less [they get], but [these companies] have upstream to downstream," said the source earlier.

The companies controlled palm oil factories, CPO refineries, cooking oil factories and biodiesel factories.

[This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia's political and business landscape.]

Source: https://www.thejakartapost.com/opinion/2023/02/15/analysis-govt-adopts-another-ill-policy-over-scarcity-of-cheap-cooking-oil.htm