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Investor Relation Unit, Directorate of International Affairs
9/21/2007 8:33 AM
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Cooking Oil Price Stabilization Program

 

19 June 2007 

Minister of Trade Mari Pangestu on June 8, 2007  issued a press release detailed Government actions to minimise volatility in cooking oil prices for consumers.  These actions include the Price Stabilisation Programme (PSH) and other government measures. These actions were adopted in an interministerial coordinating meeting held early on the first week of June 2007 and have been pursued by the Government in participation with private sector actors in the CPO sector and cooking oil processors. Three associations, GAPKI (Indonesian Confederation of Estate Companies), AIMI (Indonesian Oil Industry Association) and GIMNI (Indonesian Confederation of Vegetable Oil Industries) have joined forces in coordinating actions with their members in support of the price stabilisation programme.

The Minister of Trade confirmed that domestic price increases brought about mainly by escalating international CPO prices were not a matter of supply shortages.  CPO prices have mounted sharply since early 2007. During 2006, international CPO prices averaged US$500-US$550/ton, while in 2007, these prices have soared to US$750-US$800/ton, as in recent weeks.

The steep rise in international CPO prices is explained largely by escalating world demand for processing into biodiesel and in substitution for soybean oil. Market supply of soybean oil has diminished from conversion from soybean cultivation to maize for biodiesel production. Alongside this, the seasonal effect brought on by El Nino is likely to impact CPO production in Indonesia and Malaysia. In Q1/2007, Malaysia’s production was down 22% from the same period in 2006. However, prices are predicted to begin softening in July with added supply from CPO-producing countries as the harvest gets under way in July and August, while increased soybean production in Brazil will also ease the upward pressure on CPO prices.

Despite this, with the change in external parameters brought about by the significant increase in demand, higher international prices are forecast for 2007 in comparison to 2006. In some quarters, predictions of international prices range from US$625 to US$725/ton or Rp 7,000-Rp 8,000/kg for equivalent bulk cooking oil.

To anticipate developments on the world market, the Government is pursuing a number of actions.

“We have conducted an evaluation of the cooking oil Price Stabilisation Programme, now under way for 3 weeks. In the opinion of the Government and the three associations involved in the programme, the price stabilisation measures have successfully capped cooking oil prices, although prices have not seen significant decline. When the price stabilisation programme was launched, world CPO was on the rise. However, domestic prices have remained steady and the average national price for bulk cooking oil is hovering around Rp 8,000/kg. In the five cities targeted by the programme, bulk cooking oil prices are Rp 7,800/kg (Jakarta), Rp 7,000/kg (Surabaya), Rp 7,800/kg (Medan) and Rp 7,800/kg (Ujung Pandang), while the price in Semarang is still Rp 8,100/kg. In three other cities, Jambi, Pekan Baru and Palembang, where the price stabilisation programme operates under regional government initiatives, cooking oil prices have been brought down to about Rp 7,800/kg,” said Minister of Trade Mari Pangestu.

The Minister added, “The Government will extend the price stabilisation programme until 30 June 2007. To this end, as envisaged in Decree of the Minister of Agriculture No. 339, CPO production for cooking oil needs will be raised to 130,879 tons, or an average of 45,000 tons per week."

The reason for extension of the Price Stabilisation Programme is that it has been effectively in operation for only 3 weeks. At the end of May, only about 57% of commitments were met and more time was needed for commitments to be realised from raw material producers to processors and distributors. The government has encouraged all stakeholders, including association members and non-members, to strive for the price stabilisation target set out in Decree of the Minister of Agriculture No. 339/2007. The objective of the Price Stabilisation Programme is to secure the supply of CPO to cooking oil factories until 20 June 2007, thus allowing sufficient time for processing into cooking oil for distribution to meet the end-June 2007 target. 

The coordinating meeting also agreed on a further measure if prices do not ease by the end of June. Should this happen, CPO will be subject to an additional 5% Export Surcharge (for derivative products, an evaluation is underway, but the surcharge will also apply). The export surcharge will come into effect when international prices climb past the estimated “normal” price equilibrium, taking into account world demand and supply of CPO.

The 5% Export Surcharge was adopted by the Government after consideration of matters including the following:

  1. domestic demand and supply;
  2. mitigation of negative impact on farmers from any decline in prices to below world prices, given that smallholder estates account for about one third of CPO production; and
  3. given Indonesia’s position as a major supplier to the world market, any reduction in supply to the export market will not have a major effect on price fluctuations on the world market.

At the same time, the interministerial technical team conducted a study on the launching of a Domestic Market Obligation (DMO) programme. Two key aspects are under evaluation, should the Government proceed with the DMO. The first concerns how to design the DMO system to bring down cooking oil prices, and the second is to keep the systems for administration and imposition of sanctions uncomplicated and not leading to other problems, such as overly complex procedures.

Because of the Government concern over the impact of sharp increases in bulk cooking oil prices on low-income groups and MSEs, a study is under way on how to conduct more precisely targeted market operations to meet the needs of these consumer segments. Members of the three associations have also coordinated actions with Regional Governments for market operations in which cooking oil is sold at below market prices, i.e. about Rp 7,000/kg or less, in low-income areas.

“The government has conducted an in-depth assessment of various actions it has taken and future options, and is continually evaluating price levels achieved under the Price Stabilisation Programme. The underlying principle is that the Government is sensitive to the needs and interests of all parties, including low-income groups, and therefore seeks equitable solutions," affirmed Minister of Trade Mari Pangestu.

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With regard to cooking oil price stabilization program, The Indonesian government on Friday 15 June 2007 announced an increase in export duty on crude palm oil (CPO) and its derivatives to curb the soaring price of domestic cooking oil.

Export duty on fresh fruit bunches and kernels is raised to 10 percent from 3 percent, CPO to 6.5 percent from 1.5 percent, and crude olein, refined bleached deodorized palm oil (RBDA OPO) and RBD olein to 6.5 percent from 0.3 percent respectively.

In addition, the government also decided to impose export duty on four types of CPO derivatives that were previously exempted from export duty. The four CPO derivatives are crude stearin, RBD stearin, palm kernel oil (PKO), and RBD PKO which are now subject to 6.5 percent export duty each.

The decision was aimed at safeguarding domestic supplies to produce cooking oil at affordable prices. The government would regularly review its decision in tandem with fluctuations in global CPO prices.

Source : Ministry of Trade & Coordinating Ministry for Economic Affairs 

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