Jakarta, IO – The European Union (EU) is one of Indonesia’s third largest export destination for palm oil after India and China. Historically, a European country even played a key role in the development of Indonesia’s palm oil industry in its infancy. The first oil palm plantation in Indonesia was established by a Belgian company Socfin Group in North Sumatra over a hundred years ago, and is still in business today. Because of this special historical relationship, it isn’t surprising that EU is one of the largest consumers of palm oil. However, Indonesia’s palm oil exports to the EU have decreased significantly in recent years, as shown in Figure 1. Roundtable Sustainable Palm Oil (RSPO) estimates that more than seven million smallholders make a living from palm oil, and they collectively contribute almost half of total global palm oil production. Smallholders are a significant factor in major producing countries such as Indonesia and Malaysia, which represent 85% of the global palm oil supply (Rahman 2020). In Indonesia, the total number of smallholders were 2,685,353 farmers, accounting for about 38% of palm oil producers nationwide. In 2020 the total production of crude palm oil was approximately 49 million tons, of which 17 million tons or 35% was produced by smallholders (DG Estate Crops, Ministry of Agriculture Indonesia 2019). Across all producing countries, smallholders are disproportionately located in poorer and rural districts (Lowder et al. 2016), meaning that the impact on poverty alleviation and community development is even more pronounced in a positive sense. (Figure 1)
In 2017, for example, Indonesia exported 5.5 million tonnes of palm oil worth to the EU worth US$ 4.2 billion. The volume saw a steady decline in the next five years – hitting a low of 3.7 million tonnes in 2022 – despite the value spiking in 2021 and 2022 due to the increase in palm oil prices.
The significant drop in Indonesia’s palm oil exports to the EU is inseparable from the fact that in the last few decades Indonesia has faced many obstacles and challenges in EUbound palm oil exports. To be more specific, they are two reasons for this decline.
First, the rise of negative campaigns against palm oil industry by non-government organizations (NGOs) in the EU and Indonesia, arguing that it is unhealthy and destructive to the environment. This has resulted in a negative public perception on palm oil. Second, is the issuance of various EU regulations that impede palm oil trade.
These regulations are driven by various economic, social and environmental rationales. For example, as part of the efforts to reduce greenhouse gas emissions, environmental degradation and climate change. However, there is no denying that the regulations were also driven by competition between vegetable oils (which include palm oil) – mostly produced by tropical and developing countries such as Indonesia, Malaysia and African and South American countries – and rapeseed oil mostly produced by sub-tropical and developed countries such as EU, Canada and Eastern European nations.
In the context of this competition, palm oil is regarded as more cost-efficient and productive compared to other vegetable oils. As a result, the market share of other vegetable oils, especially those produced by EU countries, has been decreasing while that of palm oil is on the rise, as shown in Figure 2.
Indonesia has a dominant position in global vegetable oil trade, controlling 24 percent of production and 30 percent of trade, with palm oil accounting for 50 percent of vegetable oil market, as shown in Figure 3.
Faced with this challenge, vegetable oil producers in developed countries, especially EU, have demanded their representatives in the parliament to protect them in the competition with palm oil. And we know that farmer groups in the EU have a very strong lobby in the parliament. This is the reason behind the various regulations issued by the EU to hinder palm oil trade.