Thursday, July 18, 2024 | 18:40 WIB

The thorny palm oil economy

Jakarta, IO – By 2045, in the era of Golden Indonesia, palm oil production is expected to reach 100 million tons and emerge as a key component for food supply and energy transition. Hopefully, this is not merely wishful thinking. These grand targets will remain unfulfilled if they are not backed up by strategic policies and tactical steps to attain them. 

This article analyzes the economic challenges of palm oil, which appear to be getting more complicated, particularly with a lack of credible institutions to properly dissect and solve these intricate problems. This article will conclude with strategies or tactical steps to save Indonesia’s palm oil industry. 

The performance of the palm oil economy 

With 1.53 million hectares of land to be confirmed (LAD), the total area of palm oil plantations in 2023 is estimated to be 16.83 million hectares. This includes 6.30 million hectares of smallholder plantations, 8.43 million hectares of private plantations, and 0.57 million hectares of state plantations. Crude Palm Oil (CPO) production in 2023 reached 48.34 million tons, comprising 16.27 million tons from smallholder plantations, 29.51 million tons from private plantations, and 2.45 million tons from state plantations, as stated in the Ministry of Agriculture’s Plantation Statistics’ data. Meanwhile, GAPKI has higher data, reporting that total palm oil production in 2023 reached 54.85 million tons, consisting of 50.07 million tons of CPO and 4.78 million tons of Palm Kernel Oil (PKO). 

According to the Indonesian Palm Oil Association (GAPKI), the country exported 32.21 million tons of palm oil in total in 2023, with the remaining 22.23 million tons for domestic consumption, which covers 10.30 million tons for food needs, 2.27 million tons for oleochemicals, and 10.65 million tons for biodiesel. The implementation of the energy transition program under the B-35 plan in Indonesia, which aims to utilize new and renewable energy, has resulted in an increase in the demand for palm oil for producing biodiesel. 

Changes in policy to accomplish energy transition targets, such as the B-40 program, undoubtedly affect the composition of domestic palm oil consumption. Domestic market prices of cooking oil, PKO, and CPO will gradually increase over time. Here are three major challenges facing the palm oil industry, calling for justification and solutions. 

Prof. Dr. Bustanul Arifin
Prof. Dr. Bustanul Arifin, Professor of Agricultural Economics at UNILA, Board of Commissioners and Senior Economist at INDEF, and President of ISAE (Indonesian Society of Agricultural Economics-PERHEPI)

First, palm oil productivity is very low, both in smallholder plantations and large-scale private and stateowned plantations. The average productivity of fresh fruit bunches (FFB) is still very low, at 12.5 tons/ha for smallholder plantations and 17.5 tons/ha for large private plantations. This is far below the potential productivity of 30 tons/ha. CPO productivity is also very low, at 3.43 tons/ha for smallholder plantations and around 4.45 tons/ha for large private plantations. This is still far from the potential productivity of 8 tons/ha. Due to differing field control, the majority of smallholder plantations and even large private plantations have yet to adopt good agricultural practices (GAP). 

Second, a number of challenges in the field are causing the rejuvenation of palm oil plantations—in particular, smallholder palm oil rejuvenation, or PSR—to progress very slowly. As mentioned above, PSR’s poor performance contributes to low palm oil productivity. Out of approximately 6.94 million hectares of smallholder palm oil plantations, 1.36 million hectares (20 percent) consist of old plants (> 25 years) that require technical and agronomical rejuvenation. 3.94 million hectares of smallholder palm oil plantations are home to mature plants (4–25 years old), while 1.64 million hectares (24 percent) are home to young plants (less than 4 years old).

 By the end of 2024, the government hopes to have rejuvenated 500 thousand hectares (or 37 percent of the total area) of PSR. However, by the end of 2023, the actual disbursement of PSR funds only covered an area of 53,012 hectares, far from the target. Both large-scale palm oil producers and smallholder farmers are unsure about how palm oil plants located within forest areas are managed. The PSR acceleration program through partnerships with large private enterprises only reached 3,600 hectares, due to varied interpretations of several provisions in Presidential Regulation 9/2023 on the Task Force for Improving Palm Oil Industry Governance and Optimizing State Revenue. 

Third, implementing Articles 110A and 110B in Law No. 6/2023 concerning Job Creation has caused ambiguity and legal uncertainty, particularly regarding the sanctions of administrative fines and business permit revocation. According to data from the Ministry of Environment and Forestry (LHK), 2.45 million hectares of oil palm plantations are located within forest areas. Approximately 2.13 million hectares are registered as land under cultivation by 2,128 oil palm companies. According to GAPKI data, 569 companies with a total land area of 810,435 hectares have been sanctioned under Articles 110A and 110B. 365 legal entities, with a total area of around 600 hectares, have received bills under Article 110A, imposing administrative fines for forest resource provision and reforestation funds (PSDH-DR) ranging from IDR 1 to 6.5 million per hectare. A number of businesses have received bills under Article 110B that exceed IDR 120 million per acre in penalties. These palm oil companies will probably be unable to continue their operations, threatening palm oil production. The public and commercial sectors still don’t understand the “long-term improvement strategy” (Government Regulation PP 23/2021 on Forestry Management) that aims to address sustainable oil palm plantations within forest areas. 

Rescuing the palm oil industry 

First, increase oil palm productivity, particularly among smallholder plantations, by giving oil palm farmers proper mentoring and offering incentives to obtain improved production finance and technology. These foundational actions can significantly contribute to rescuing the palm oil industry, from upstream to downstream. In order to meet the strategic goals of producing 100 million tons of CPO by 2045, better mapping to address the issues from upstream is needed. 

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Second, accelerating the Smallholder Oil Palm Replanting Program (PSR) through partnerships, saa by providing incentives and legal certainty to partner the private sector with farmers. Streamlining the process for oil palm farmers and private companies to acquire technical recommendations from the Department of Plantation regarding the status of oil palm land outside forest areas or covered by a Business Use Right Certificate (HGU). 

Third, enhancing legal certainty for businesses or private companies with land ownership certificates (SHM) and Plantation Business Use Right Certificates (HGU) for oil palm plantations that are regulated under the Basic Agrarian Law (UUPA) 5/1960 and its regulations.