24.10.2023 (The Jakarta Post) - It is not Indonesia’s position as the world’s largest crude palm oil (CPO) producer, with a 60 percent share of the global supply, but market confidence in the pricing mechanism at the newly established Crude Palm Oil Futures Exchange in Jakarta, that will determine the success of the bourse in becoming a credible price-discovery center.

The market confidence built since 1980 has made the Malaysian CPO Futures Exchange (FCPO) in Kuala Lumpur the only credible palm oil price-discovery bourse in Asia, even though that country is only the world’s second-largest CPO producer.

We are therefore encouraged by the wise statement by Didid Noordiatmoko, the chairman of the Indonesian Futures Exchange Supervisory Board (Bappebti), the regulatory body of the new exchange, at the launch of the Crude Palm Oil Futures Exchange on Oct.13. “We established this CPO bourse not to compete with the Malaysian CPO futures exchange. The goal is to have a CPO reference price that is transparent, accountable, real-time and that also creates a level playing field,” Noordiatmoko asserted.

We also commend Bappebti’s correct decision not to hastily make participation in the bourse mandatory for buyers and sellers, instead emphasizing concerted efforts to gradually develop the market infrastructure and to design and provide the right incentives to attract bourse participants.

True, a fair market mechanism and competitive landscape would attract traders to do business in the bourse. The reference price has to be credible and established through fair market mechanisms. This basic principle should be upheld, especially because over 70 percent of Indonesia’s CPO supplies are controlled by only eight to 10 business groups.

The Indonesia Commodity and Derivatives Exchange (ICDX) is the operator of the bourse, which began trading on 0ct. 23 initially with only 18 participants. The bourse will log local CPO trades in rupiah, offering real-time price updates. The price will serve as a benchmark for both domestic and international palm oil and possibly as price references for taxation purposes.

Currently, most Indonesian palm oil exporters conduct sales directly with buyers, without going through an exchange, while auctions held by state-run trading house PT Kharisma Pemasaran Bersama Nusantara (KPBN) only offer physical trades and not futures contracts.

Other factors, which will help traders trust and promote transactions in the bourse, are a well-established and regulated market infrastructure. This helps in instilling confidence among market participants and ensures transparency in trading activities The regulatory oversight will help maintain the integrity of the market and ensure that trading practices are fair and transparent. The futures exchange should also be made relatively liquid, attracting a diverse range of participants. The availability of liquidity enhances the efficiency of price discovery and makes the market accessible to various players, including hedgers and speculators.

 A well-regulated exchange that charges fairly low transaction costs and runs a fair and transparent pricing mechanism will benefit players in the edible oils and fats industry, fund managers and financial institutions. They can use the bourse as a risk-management solution and as a tool for managing price fluctuations in the market.

Plantation companies, refineries, exporters and millers can use the futures exchange to manage risk and hedge against the risk of unfavorable price movements in the physical market. The absence of a credible bourse was the main cause of the edible oil market chaos and crisis in Indonesia in 2022 that forced the government to issue a series of market-distortive measures.

 It would be better for the promotion of the credibility and integrity of the bourse in the global market if Bappebti eventually requires that the trades relate only to CPO that has been certified according to the Indonesian Sustainable Palm Oil principles.

This certification is imperative in coping with the enforcement of tougher sustainability principles for farm produce by the European Union and the United States.

https://www.thejakartapost.com/opinion/2023/10/24/ensuring-fair-cpo-prices.html