02/12/2016 (Jakarta Post) - Our attendance at the 12th Indonesian Palm Oil Conference (IPOC) in Bali reveals that market participants expect crude palm oil (CPO) prices to rise going forward. Indonesian Palm Oil Association (GAPKI) chairman Joko Supriyono spoke about the CPO price level, which has climbed from its six-year low at US$630 per ton in 2015 to $660 per ton as of October.

He pointed out that the price recovery was due to a production drop post El Niño leading to palm oil stocks being at the lowest level in recent times of 1.8 million tons in the first half of this year, down 59 percent from 4.5 million tons in December 2015. In addition, he stated that Indonesia’s palm oil production in 2016 may only reach 30.9 million tons, down 10 percent year-on-year (yoy). This should drag this year’s exports down by 15 percent yoy to 22.5 million tons.

Separately, at the conference, Agrarian and Spatial Planning Minister Sofyan A. Djalil cited that one of the major problems faced by the palm oil industry is agrarian and spatial planning. To address the problem, the minister has issued a policy to accelerate the issue of time for cultivating rights certificates (HGUs) to 90 days.

The government will also undertake a pilot project to certify 1,000 plots of smallholders’ land, plasma and public land, with a total area of 25,000 hectares. The government aims to issue 5 million cultivating rights certificates next year.

At the conference, Agriculture Minister Amran Sulaiman stated that there are six government programs to develop the Indonesian palm oil industry and increase its sustainability.

The first program is focused on improving the productivity of smallholders’ plantations and increasing funding support for Indonesia Estate Crop Fund for Palm Oil (BPDP). The second program hopes to accelerate and encourage Indonesian palm oil producers to obtain Indonesia Sustainable Palm Oil (ISPO) certification for their products to be accepted internationally.

Increasing utilization of peatland for oil palm plantations to further intensify palm oil productivity and to prevent forest fires is the third program in this measure. The fourth program aims to convert the legal status of smallholder plantations from plantation business permits (IUPs) to HGUs to provide legal certainty.

The fifth program works to focus exports on major CPO markets such as Bangladesh, China, India and Pakistan and reduce exports to Europe due to the adverse publicity on CPO products from Indonesia. The sixth and final program is in place to start to develop land integration for corn and oil palm plantations to further increase land productivity as well as farmers’ incomes. This year, the government’s target is to reach 724,000 ha of integrated corn and oil palm plantations.

According to Bayu Krishnamurti from BPDP, the consumption of biofuel in the government’s requirement of 20 percent biodiesel blending ( B20 ) has reached 2.2 million kiloliters, equal to 20.6 percent of the monthly diesel consumption in public service obligation (PSO) during January through October, exceeding the initial target.

The B20 program has also reduced fossil fuel imports by $1.1 billion, employed 382,000 people in the farming industry, helped offset the hidden costs of fossil fuel and reduced carbon dioxide ( CO2 ) emissions. Since the implementation of the B20 program in 2010, CO2 emissions have decreased by 11.3
million tons.

At this stage of the market cycle, we are more positive on the CPO sector given outlook of higher prices ahead, aided by the B20 program; however, we retain our “neutral” stance on the sector, as we expect production to kick in starting in the second half of next year.

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The writer is research analyst at Bahana Securities