Jakarta, IO – Finally, after a long delay, the Palm Oil Futures Exchange was launched by the Trade Ministry, on Friday (13/10). The establishment of a CPO bourse has long been a dream of Indonesian palm oil stakeholders. However, it is worth mentioning that it is in fact not the first CPO exchange in Indonesia. It complements the several existing exchanges, namely, the Indonesia Commodity and Derivatives Exchange (ICDX) for CPO asset class; the Jakarta Futures Exchange for palm olein (derivative of CPO) asset class; the physical exchange run by the PT Kharisma Pemasaran Bersama Nusantara (KPBN), a subsidiary of state-owned plantation holding company PT Perkebunan Nusantara III (PTPN); and the CPO auction held by PT Astra Agro Lestari, one of the leading palm oil companies in Indonesia.
The strategic importance of a CPO bourse
It is crucial that Indonesia has its own CPO futures market, because the country is the largest palm oil producer in the world. It would be ironic if our palm oil trade is referenced to a price set by exchanges in other countries, especially countries which do not have the industry. Not only that: Indonesia is also the largest consumer and exporter of palm oil. So, if there is an argument that CIF Rotterdam has so far been used as a price reference, because the EU is the largest consumer (even though this is no longer the case) and the market for palm oil and other agricultural commodities is demand-driven, this argument is no longer valid. It is natural that Indonesia should become a reference in the global palm oil trade. Figures 1,2 and 3 show Indonesia’s production, exports and consumption of palm oil.
However, it should be noted that as in the case of palm oil and other commodities, the largest producer does not necessarily become the reference for trade, including the price. Take petroleum, for example, where OPEC (an association of petroleum-exporting countries) uses West Texas Intermediate in the US and Brent Crude in Europe as the price benchmark. Likewise, for commodities such as nickel, gold and copper, the reference prices are not really set by the principal producing countries, but rather by commodity Exchanges in other countries. In the case of palm oil, it is interesting that Bursa Malaysia Derivatives (BMD) Berhad in Kuala Lumpur is able to rival its competitor in Rotterdam.
Commodities trading and price trend
Therefore, it is necessary to study why the trading center for a commodity, including the reference price, is in one country and not in another. To answer this, we need to look at the historical context, trend in production and consumption patterns, and the availability of facilities that can facilitate and upgrade the efficiency of commodity trading. Historically, we learn that the agricultural trade in commodities initially occurred between commodity-producing countries and -consuming countries. However, these trade relations are not equal, because in general the former were colonized by the latter. Thus, trade became more demand-driven and consumer countries had the power to determine the price.
Later, as the producing countries gained their independence, they started pushing to equalize their position in commodity trade. This explains the various measures to nationalize or acquire shares previously owned by foreign companies in commodity-producing countries. This was then followed by the establishment of various market institutions in these countries, including commodity exchanges. As a result, the mechanism of price formation is no longer demand-driven, as producers seek to receive a more balanced share of the price and an equal position, as illustrated by the establishment of BMD Berhad in 1980, following the takeover of Guthrie and Sime Darby by Permodalan Nasional Berhad (PNB).
Another factor that explains the development of the trading exchange is the availability of institutions and market facilities that are efficient and competitive, where prices are discovered based on market mechanisms (supply and demand) without or with minimal intervention. This way, the market will be regarded as credible, transparent and efficient.
What’s in store for the Indonesian CPO bourse?
It is hoped that through a Palm Oil Exchange, planned to become operational on October 23, price discovery will begin and the credibility of the exchange will develop, so that in the first quarter of 2024 it can set a price reference. At the launch, 18 CPO producers were ready to participate in the Exchange. And, based on information from the Futures Exchange Supervisory Board (Bappebti), the Exchange is currently based on the local palm oil trade, and is not set up for export transactions. Trading via the Exchange is voluntary.
It is still too early to judge what the outlook for the Indonesian CPO Exchange will be over the medium and long terms. However, we need to zero in on several aspects, so that the development of the Indonesian CPO Exchange can meet our shared expectations. First, the CPO Exchange is now focused on local (domestic) trading. The bourse administration must be well aware of the structure, patterns and local palm oil trading networks, to facilitate business actors who want to participate in the Exchange. In this case, it is important to know that local palm oil trade patterns have prevailed so far.
There are several mechanisms of local palm oil trade, namely, through an auction carried out by KPBN and PT Astra Agro Lestari, and there are as well direct transactions between sellers and buyers through short and medium term contracts. While the market structure is characterized by many sellers and fewer buyers, the market is nonetheless competitive. As a result, transaction costs are low and efficient. On the other hand, sellers are relatively more spread out compared to buyers, who are generally also palm oil producers. The implication for the Indonesian palm oil market is that it must be able to compete with an existing trading ecosystem. Transaction fees must be attractive and low compared to current transaction costs. In addition, it is necessary to consider that because the sellers are spread across various regions in Indonesia, delivery hubs should be in order to cut transaction costs.
Second, in the initial draft of the regulation, there was a plan to make it mandatory for all CPO exports to go through the Exchange. This created a lot of resistance from business actors, because it was not in accordance with the best practices of stock exchange regulations. The decision to make it voluntary is laudable because it shows that the regulator takes into account the aspirations of business actors. Voluntary exchange rules should be maintained in the future, when the Exchange also covers export transactions.
Third, the initial draft also stated that physical transactions that would occur on the Exchange were linked to the Domestic Market Obligation (DMO) policy, where business actors are required to supply a certain volume to the local market, by before they can obtain export permits through transactions on the Exchange. This regulation was opposed by business actors because it would create an unhealthy market and distort prices; thus, there is concern that the market will not be credible. However, because the Indonesian Palm Oil Exchange currently only regulates physical trading within the country, the rules on DMO obligations have yet to apply. In this regard, what needs to be emphasized is that there should be, when the Indonesian Palm Oil Exchange is expanded to include export transactions, decoupled from the DMO obligations.
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Fourth, as mentioned earlier, the Indonesian Palm Oil Exchange must compete with existing exchanges. Therefore, other than having to be efficient and competitive in terms of transaction costs, it is necessary to think about the parties participating in the Exchange, to consider incentives – possibly in the form of tax breaks or others that could draw participation from business actors involved in the Indonesian Palm Oil Exchange.
Last but not least, it is worth noting that the process of becoming an influential exchange reckoning with the global palm oil scene through the ability to set benchmark price can take a fairly long time, as the experience of BMD Berhad, established in 1980, shows. Therefore, palm oil industry stakeholders, including regulators, must be able to cooperate and be consistent in developing exchange rules that are capable of creating a credible, transparent and fair market. (Fadhil Hasan)