Indonesia’s Palm Oil Crisis

In News

• The world’s largest producer and exporter of palm oil is facing domestic shortages, leading to price controls and export curbs.

Reasons for oil crisis in Indonesia

• The Indonesian government imposed a ceiling on retail prices.
  • The price caps, however, led to the product disappearing from the market, amid reports of hoarding.
• The government also made it compulsory for exporters to sell 20% of their planned shipments in the domestic market.
• Supply disruptions: manmade and natural in other cooking oils, especially sunflower and soyabean.
  • Ukraine and Russia together account for nearly 80% of the global trade in sunflower oil, quite comparable to the 90% share of Indonesia and Malaysia in palm.
  • Soyabean oil, too, is facing supply issues due to dry weather in South America.
  • Supply tightness in sunflower and soyabean from war and drought, respectively has, in turn, transmitted to palm oil.
• Use of palm oil as a biofuel: The Indonesian government has, since 2020, made 30% blending of diesel with palm oil mandatory as part of a plan to slash fossil fuel imports.

Impact on India

• India is the world’s biggest vegetable oils importer. Out of its annual imports of 14-15 mt, the highest share is of palm oil, followed by soyabean and sunflower.
  • Indonesia has been India’s top supplier of palm oil, though it was overtaken by Malaysia in 2021-22.
• The Indonesian government lifted its retail price caps on palm oil along with the 30% domestic market sale obligation on exporters. At the same time, it levied a progressive tax on exports, linked to a reference price for CPO.
• The restrictions on exports, even in the form of levy, take into cognizance Indonesia’s higher population as well as its ambitious biofuel programme.

About Palm Oil

• It’s an edible vegetable oil that comes from the fruit of oil palm trees, having the scientific name Elaeis guineensis. 
• Palm oil is an incredibly efficient crop, producing more oil per land area than any other equivalent vegetable oil crop fulfilling 35% of the world’s vegetable oil demand on just 10% of the land. 
• Two types of oil can be produced, crude palm oil comes and palm kernel oil, of which crude has more demand. 
• Palm oil is an extremely versatile oil that has many different properties and is present in nearly 50 per cent packaged. 
• Palm oil is a major driver of deforestation of some of the world’s most biodiverse forests, destroying the habitat of already endangered species like the Orangutan, pygmy elephant and Sumatran rhino. 

Oilseeds

• India is one of the major oilseeds growers and importers of edible oils. 
• India’s vegetable oil economy is the world’s fourth-largest after the USA, China & Brazil. 
• The oilseed accounts for 13% of the Gross Cropped Area, 3% of the Gross National Product and 10% value of all agricultural commodities. 
• Oilseeds cultivation is undertaken across the country in about 27 million hectares mainly on marginal lands, of which 72% is confined to rainfed farming.
• A substantial portion of our requirement of edible oil is met through the import of palm oil from Indonesia and Malaysia.

Challenges associated with Palm Oil

• Faulty trade policy:
  • It undercut the gains in oilseed productivity which were driven by the technology mission of the late 1980s and early 90s. 
  • When the government cut duties on edible oil imports, the Indian domestic market collapsed. 
  • Palm oil imports from Southeast Asia became cheaper than domestic oilseeds because of the subsidies provided in those countries
• Small landholding and water shortage:
  • small land-holdings of farmers with limited resources, erratic monsoon leading to the shortage of water, and overall shortage in water flow impacts growth of palm oil which is a water guzzling crop. 
• Monoculture crop:
  • This attribute restricts the farmer from growing anything else and thereby reducing income flow as well.
• Competition:
  • competition from other economically viable crops such as rubber, areca nut, sugarcane, banana, coconut etc.
• Community land ownership: 
  • The impact on community ownership of tribal lands as land being used by the Tribal community is being taken over by big farmers.
• Long gestation period:
  • It has a long gestation period and so is unsuitable for small farmers: Restricts income flow to farmers for at least 4-5 years before giving real fruits. 
• Invasive species: 
  • Oil palm is an invasive species and its plantations would denude forest cover and destroy the habitat of endangered wildlife.

Steps Taken by the Government

• The central government has taken steps to cool prices, including reducing import duties on palm, soybean oil and sunflower oil, and limiting inventories to prevent hoarding.
• The immediate solution is to import refined palm oil and sell through its public distribution system (PDS) at below market value.
• Duty rationalization: A rise in global rates caused domestic edible oils to surge last year, but the federal government managed to bring down prices through several measures, including duty rationalization.
• India is working on medium- to long-term plans to cut its dependence on imported edible oils.
  • Longer-term options for the government include building up reserves, boosting domestic production and allowing commercial cultivation of genetically modified (GMO) oilseed crops.
• National Mission on Edible Oils-Oil Palm: India is trying to boost domestic production to overcome its dependence on imports. The government launched a $1.5 billion initiative called the National Mission on Edible Oils-Oil Palm last year to improve self-sufficiency.

Way Forward

• India should build an edible oil reserve to insulate from any price spikes.
  • This will allow the government to release supply in times of shortage, to soften prices and to curb speculation trading and hoarding.
• This would be similar to what China does with its massive stockpiles of crude oil, strategic metals and farm goods.
• India’s food stockpile is focused on grains like wheat and rice, which the country produces in abundance. It hasn’t been able to replicate that with edible oils as India relies on imports for 60% of its needs.
• More land should also be diverted to grow soybeans, sunflower and rapeseed crops.
• The government will need to spend 50 billion rupees a year to boost oilseed output.
• Farmers will need to shift away from growing wheat and rice, where they’re guaranteed a minimum price for their crops.

Source: IE