Indonesia’s Cooking Oil Crisis: Causes and Consequences

World’s largest crude palm oil producer Indonesia faces the challenge of managing the rising cost of cooking oil, as external shocks and supply issues worsen, going into the fasting month of Ramadhan.

‘Cheap’ cooking oil has recently become scarce in Indonesia, the world’s largest crude palm oil (CPO) producer. As CPO is the main ingredient for cooking oil producers, accounting for about 80 per cent of production costs, it is ironic that this crisis has occurred. Indonesian consumers buy two types of cooking oil: pricier packaged and branded oil, and a subsidised version sold in bulk for lower-income households. The price of branded cooking oil has almost doubled, from about Rp 14,000 per litre in March 2021 to Rp 22,000 per litre in March 2022. Market manoeuvres subdued past price increases, but cooking oil has remained stubbornly expensive since late 2021 due to higher global CPO prices.

Under pressure, the Indonesian government has reverted to more interventionist measures. On January 26, 2022, without prior consultation with producers, Jakarta set a Rp 14,000 per litre price ceiling for cooking oil. As cooking oil producers voiced concern that the ceiling was much too low, cooking oil supplies began to disappear from the market. There were reports of hoarding, as traders and consumers anticipated further price increases. Producers were also reluctant to produce at the government’s set price, given the rise in CPO prices.

Indonesia’s Trade Ministry has historically relied on various measures to ensure sufficient domestic supply for local producers, to maintain low and stable domestic retail prices. For the CPO industry, these include cooking oil subsidies, a domestic market obligation (DMO) for exporters in the form of export quotas, and more recently, a domestic price obligation (DPO) for cooking oil producers in the form of price ceilings. The DMO quota requires CPO exporters to sell 20 per cent (later 30 per cent) of their export volume for domestic consumption, and the DPO for CPO is set at Rp 9,300 per kilogramme. In January 2022, the government fixed the highest retail price (harga eceran tertinggi, or HET, in Indonesian) for cooking oil producers at Rp 11,500 per litre for bulk and Rp 14,000 per litre for premium packaged cooking oil.

The price of branded cooking oil has almost doubled, from about Rp 14,000 per litre in March 2021 to Rp 22,000 per litre in March 2022.

Trade Minister Muhammad Lutfi was quick to blame so-called ’cooking oil mafia and speculators’ for causing these shortages and making it difficult for the government to control price increases. He reported that his team had discovered the illegal use of subsidised bulk cooking oil, the reselling of subsidised bulk cooking oil, and uncontrolled exporting of subsidised cooking oil by such actors.

However, externally rising global demand for CPO and increasing local demand from Indonesia’s growing biodiesel (B-30) activity starting in 2020 had already put upward pressure on CPO prices. For example, the US-China trade dispute led China to switch to palm oil to reduce its reliance on American soybeans, while bad weather in Brazil and India impacted their soybean and rapeseed production, thus increasing global demand for CPO. Lutfi also noted that the Russian invasion of Ukraine has had an unexpected impact, causing a sharp rise in CPO demand worldwide. As Russia and Ukraine are major producers of sunflower oil, disruption in its supply following the month-long war has shifted demand from sunflower to CPO oil.

The average world CPO price has risen by 50 per cent between 2020 and 2021, from US$752 per metric ton to US$1,131 per metric ton. By February 2022, CPO prices had reached a staggering US$1,552 per metric ton, the highest in history (see Figure 1). Together with the spike in demand, global and regional CPO supplies have dropped. In addition to rainy weather leading to floods adversely impacting CPO production in Malaysia, pandemic-related labour mobility issues, supply chain bottlenecks, and high shipping tariffs have contributed to Indonesia’s predicament.

Figure 1: Palm Oil Price (US$/metric ton)


Source: World Bank

Domestic price or quota fixing policies often create considerable distortions, especially when global market prices are unstable. It is during volatile periods that price controls and export quotas become ineffective, as they are difficult to enforce, especially when the gap between global and local fixed price widens. This is what has led to the recent cooking oil scarcity across Indonesia. Setting ‘one price’ harms not just consumers but also cooking oil producers and palm oil farmers, who have faced higher production and distribution costs.

On March 26, 2022, Jakarta finally lifted its price ceiling policy on packaged cooking oil, while maintaining the Rp 14,000 per litre price cap on bulk cooking oil. Packaged cooking oil prices jumped to Rp 25,000 per litre, but cooking oil supply shortages dissipated and availability was restored. The Trade Ministry also retracted its 30 per cent DMO quota for CPO exporters and instead raised the progressive levy on CPO exports to US$375 per ton (from US$175 per ton) if global prices should move above US$1,500 per ton. Proceeds from the higher levies will be used to subsidise bulk cooking oil and to help maintain its price at the desired benchmark of Rp 14,000 (98 US cents) per litre.

Going into Ramadhan, the fasting month, in April, Indonesians’ demand for cooking oil will rise further. It is therefore critical that the government keeps a flexible pricing and open trade policy for essential foodstuffs to ensure their smooth distribution and sufficient supply across the country. The police have already been tasked to supervise the distribution of bulk cooking oil and to maintain public order. Jakarta might also need to consider providing more assistance to lower-income households, and moving away from less efficient measures like price and quota fixing. One option would be to shift the current broad-based subsidy for bulk cooking oil to more targeted subsidies where the funds are provided directly to lower-income households. []

Source: Fulcrum

Post a Comment