Indonesia palm oil firms warn of food security risks as biodiesel use rises
28/02/2024 (Nikkei Asia), Jakarta - Indonesian palm oil producers are voicing concerns that the continuing rise in domestic demand for biofuels could harm the country's food security and take a toll on exports amid stagnant production of the commodity.
Consumption of palm oil for biodiesel in Indonesia surpassed that for food for the first time last year, according to the Indonesian Palm Oil Association, commonly known as GAPKI from its Indonesian initials. About 46% of the total 23.2 million metric tonnes was for biodiesel, versus 44% for food and 10% for oleochemicals, used in the production of items like hand sanitizers and soaps.
"Domestic consumptions continue to increase. This is why we've been worried about [stagnant] production," GAPKI Chairman Eddy Martono told reporters on Tuesday. "It's a warning for us. There will be competition between food and energy, and eventually ... exports will be sacrificed."
Palm oil is one of Indonesia's biggest exports, along with coal and nickel products. Record prices of such commodities during the global recovery from the COVID-19 pandemic and amid the war in Ukraine have helped Indonesia book over 40 consecutive months of trade surpluses.
Nearly 58% of palm oil produced in Indonesia, the world's largest producer of the most widely consumed vegetable oil, were exported last year. But that figure has been declining in recent years as domestic consumption has gone up. This is mostly fueled by the government's biodiesel push, under which all diesel fuels sold in the country are mixed with palm oil as part of efforts to curb both carbon emissions and Indonesia's rising oil import bills.
The government launched a mandatory B35 biodiesel program in February last year, requiring a 35% blend of palm oil, and is considering whether to introduce a B40 program later this year.
"I think for B40, [our palm oil stock] is still secure," Martono said. "But for further increases -- for example, there is an ambition for a 100% biodiesel -- we would need triple the current figure."
Domestic consumption for food and oleochemicals is also projected to continue to increase, albeit at a slower pace. Production, meanwhile, has stagnated in recent years due to aging plantations and a moratorium on opening new ones amid deforestation concerns. Nevertheless, Indonesia's palm oil output is expected to increase 5% this year from 54.8 million tonnes in 2023, with effects from the El Nino dry season seen as easing.
Separately, Indonesia's chief economic minister, Airlangga Hartarto, said after a cabinet meeting on Tuesday that the government was considering a doubling of the subsidy for replanting aging plantations by smallholder farmers to 60 million rupiah ($3,800) per hectare, in line with a suggestion from GAPKI. Areas totaling up to 180,000 hectares are targeted in the program.
Martono said some countries like Pakistan, which has emerged as a top importer of Indonesian palm oil, have already expressed concern over potential declines in the Southeast Asian nation's exports. He said Pakistan is "very worried" that there could be another repeat of the ban on palm oil exports that Indonesia imposed in 2022 amid a shortage of cooking oil at home. The shortage came as prices of all edible oils soared following Russia's invasion of Ukraine.
Palm oil prices have since fallen from their 2022 highs. The benchmark CIF Rotterdam price for crude palm oil lost roughly 29% last year to an average of $964 per tonne. GAPKI has projected that prices will stay around the same level -- between $950 and $1,000 per tonne -- in the first half of 2024.
Echoing remarks by Indonesian government officials, GAPKI called on the European Union to delay the implementation of the EU Deforestation Regulation, due to take effect next January. Martono said that GAPKI hopes the new restrictions against products linked with deforestation concerns could be delayed for another year and that Indonesian palm oil producers and the government are working to make Indonesia a "low-risk" and not a "high-risk" country.
GAPKI members have expressed concern that a "negative campaign" against palm oil has started to spread beyond the EU, including in China and India, the two largest importers of Indonesian palm oil.