Jakarta, IO – Indonesia’s performance of the palm oil-based economy in 2023 was rife with drama, even though it was not as catastrophic as the export bans of crude palm oil (CPO) and its derivatives previously imposed in 2022. It only feels like yesterday when the ban on CPO exports around the Ramadan (fasting) month in 2022 caused the price of fresh fruit bunches (FFB) to plummet to under IDR 1,000/kg. The extreme drought of El Niño in 2023 would not greatly impact CPO production performance. CPO production in 2023 is estimated to be 48.6 million tons, and palm kernel oil (PKO) production is predicted to be 4.6 million tons. So, the total palm oil production is 53.2 million tons, an increase of 3.81% over total production of 51.2 million tons in 2022.
The theatrics of the palm oil economy began when the European Union (EU) again accused Indonesian palm oil as the cause of deforestation through indirect land use changes (ILUC). Indonesia filed a lawsuit for discriminatory actions with the Dispute Settlement Body (DSB) of the World Trade Organization (WTO). The final decision on the results of the lawsuit should be announced in December 2023.
Domestically, the Government responded to EU accusations regarding ILUC by making policy corrections through Presidential Regulation 9/2023 on the Task Force for Improving Palm Oil Industry Governance and Optimizing State Revenue. The task force is assigned to resolving the issue of the legality of oil palm land in forest areas. Businesses and palm oil farmers both face legal uncertainty on the implementation or coercive measures to resolve cases of overlapping and “sustainability” of oil palm land use.
This article analyzes the prospects for a palm oil-based economy in 2024, based on the dynamics of the business and political environment, as well as geostrategic factors and global economic changes. The article concludes with several business strategies and policies to face the year 2024 that will bring political changes.
Production and Consumption Performance
Indonesia’s palm oil production is largely determined by the plantations and the palm oil industry in Sumatra and Kalimantan. Meanwhile, palm oil production in Sulawesi and Papua is still “learning”, as it has only just begun; it may become a prominent player in the next ten years. Extreme drought caused by El Niño has affected precipitation in Sumatra and Kalimantan, resulting in a production cycle change. A peak production that used to occur in August-September has now shifted to April-May.
The average FFB productivity in 2023 decreased to 15 tons/ha. Large plantations can produce 18 tons/ha, while smallholder oil palm can only produce 11 tons/ha. Businesses and the Government are both obliged to increase FFB productivity, at least approaching a potential productivity target of 30 tons/ha. If successful, a palm oil production increase will not require any plantation expansion, especially if it causes forest destruction.
Domestic palm oil consumption in 2023 is estimated to rise by more than 10%, especially for biodiesel (10.6 million tons), food (10.4 million tons) and oleochemicals (2.3 million tons), due to the intensive implementation of the energy transition policy towards new and renewable energy and the B-30 and B-35 targets for the industrial and transportation sectors. CPO consumption for cooking oil rose 5%, with a hope of no painful spike in retail prices.
The Oil World Institute (November 2023) estimates that global vegetable oil production growth will slow down to 4.2 million tons in 2024. Vegetable oil stocks until October 2023 are still shrouded in uncertain global demand from the beginning of 2024.
The prospects for the palm oil industry are expected to brighten slightly by the end of 2024 because global soybean oil production will decline, and CPO prices will rise. The prospects for palm oil-based industries in 2024 can be summed up as follows. Palm oil production (CPO and PKO) will grow 5%, reaching 56 million tons. Palm oil consumption will also rise by 9% and reach 25 million tons, because the allocation for cooking oil and biofuel consumption will continue to grow. However, export performance in 2024 will slump, particularly in the EU, due to the increasingly intricate requirements for sustainability. Businesses in the palm oil industry and the Government need to watch out for an increase in palm oil stocks of 5 million tons because a price decline is just around the corner.
Exports and Price Dynamics
Palm oil exports in 2023 are estimated to fall by 3.5% because CPO exports fell from 3.5 million tons in 2022 to 2 million tons. Palm oil products from refineries rose to 21.8 million tons, and oleochemicals grew to 4.8 million tons. Similarly, CPO exports to the EU plummeted, especially after the Renewable Energy Directive (RED) II policy mentioned previously. Even though Indonesia’s palm oil exports to the EU only totaled 12%, many countries often use the EU market as a benchmark for sustainability standards for the palm oil industry. Indonesia’s largest share of palm oil exports include markets in China (18.7%), India (16.3%), Pakistan (8.3%), the United States (6.7%), Africa (9.4%) and the Middle East (4.3%). The search for new markets in Central Asia and Latin America can be an alternative for developing palm oil exports in the future.
The price of CPO on the world market continues to slip, now down to USD 804.3/ton, and the price of PKO continues to fall to USD 912.4/ ton. CPO prices reached a record high in March 2022 at USD 1,777/ ton because global petroleum was also at a high level of USD 112.4/ barrel. After global conditions began to cool off and competition with other vegetable oils became less intense, CPO and PKO prices slowly began to decline.
The Commodity Market Outlook released by the World Bank (November 2023) predicts that CPO prices in 2024 will continue to fall to USD 900/ton, due to relatively massive global stocks. The decline in global oil prices to USD 84/ton in 2023 and USD 81/ton in 2024 significantly affects the decline in global CPO prices. In fact, the World Bank predicts that CPO prices will further slide to USD 850/ton in 2025.
To sum up, palm oil industry players and smallholder farmers must strive to prioritize productivity increases in their action plans. The target for palm oil rejuvenation, both independently and through the community palm oil rejuvenation (PSR) program, needs to be amplified in 2024. Improvement must start from upstream, by providing certified quality palm oil seeds instead of random seeds from the “street” or propagation. Plantation Offices across Indonesia must assist independent oil palm farmers and partner farmers in increasing the productivity of oil palm plantations.
The Government and businesses must collaborate to intensify the promotion of “good palm oil” as a future investment. Palm oil promotion and diplomacy must not be seen as a cost-centered activity, especially since the palm oil-based economic value is more than IDR 1,500 trillion. In addition to taking legal action at the DSB-WTO, Indonesia should implement economic cooperation, such as the Indonesia-European Union Comprehensive Economic Partnership Agreement (IE CEPA), as an important benchmark for building “good palm oil” diplomacy.