The Recent Development of The Indonesian Palm Oil Industry
Indonesia’s palm oil industry has, in the past few years, attracted the attention of the world community because of its rapid development, which has changed global competition over vegetable oil, and also because of a number of related social, economic and environmental issues. The Indonesian palm oil industry has a long history as it has existed in the country since the colonial era.
The palm oil story began with the planting of four oil palm seeds brought by Dr. DT Pryce in 1848 to be planted as part of the collection of the Bogor Botanical Gardens. Two of the seeds came by way of the islands of Bourbon and Mauritius and the other two seeds, of the Dura type, came by way of Amsterdam. Seeds from the resulting oil palms at the Bogor Botanical Gardens were then planted as ornamental plants and as experiments to test suitable growth locations in Java, Sulawesi, Kalimantan, Nusa Tenggara, Maluku and Sumatra. In North Sumatra the main site was on the Deli Tobacco Plantation.
In 1878, an oil palm plantation covering an area of 0.4 hectares was developed as an experiment in the Deli district by the Deli Maatschappij. The experiment’s results as reported by J. Kroll, the manager of the Deli Maatschappij, were quite encouraging. The production was better than in its origin habitat in West Africa. However, the processing of the oil palm fruit was still a problem at that time. In 1911 a Belgian company opened the first commercial oil palm plantations in Pulau Raja (Asahan) and Sei Liput (Aceh) and a German company also opened an oil palm plantation in Tanah Itam Ulu. Therefore, 1911 is considered as the beginning of oil palm plantations in Indonesia. The Belgian and German investors’ ventures into oil palm plantations were latter followed by other foreign investors, including some from the Netherlands and Britain.
In 1916 there were 19 oil palm plantation companies in Indonesia and the number increased to 34 companies in 1920. The first palm oil mill (PKS) in Indonesia was built in the Sei Liput in 1918 and the second in Tanah Itam Ulu in 1922. Indonesia’s palm oil industry began its rapid growth after the successful establishment of large national private plantations (PBSN I,II,III) and the introduction of cooperation between oil palm farmers and corporations known as the Nucleus Estate and Smallholders (PIR) program. After the successful trial of the World Bank-financed PIR program (PIR I-IV), it was further developed into various other PIR models.
Special PIR and Local PIR were introduced from 1980 to 1985 in order to develop the local economies; PIR Transmigration was developed from 1986 to 1995 in line with the opening of new territory and PIR Primary Credit Cooperatives for Members were started in 1996, associated with the development of rural co-operatives. Through these PIR schemes, oil palm plantations expanded rapidly from North Sumatra and Aceh to Riau, Kalimantan and other parts of Indonesia. The total area of oil palm plantations in Indonesia increased from about 300,000 hectares in 1980 to about 11.6 million hectares in 2016 (Figure 1.1). Meanwhile, CPO production increased from about 700,000 tons in 1980 to 33.5 million tons in 2016 (Figure 1.2).
The rapid growth in Indonesia’s CPO production has changed the country’s position in the world’s palm oil market. In 2006, Indonesia succeeded in replacing Malaysia as the world’s largest CPO producer and by 2016 Indonesia’s share reached 54 percent in the world’s CPO production (Figure 1.3), while Malaysia was in second position with a 32-percent share.
Indonesia mostly produces palm oil for export and only about 20 to 25 percent is for domestic consumption (Figure 1.4) in, for example, the oleo food industry and for oleo chemicals, detergents, soaps and biodiesel (Figure 1.5).
In 2011 Indonesia began to promote the downstream palm oil industry through the development of the oleo food processing industry, the oleo chemical processing industry and biofuel production. In addition to adding value, the development of the downstream industry is also meant to reduce Indonesia’s dependence on the world CPO market.
The downstream biofuel industry was developed to support the policy of mandatory use of of B-5 (2010), B-10 (2012), B-15 (2014) and B-20 (2016) biodiesel. The goal is to reduce Indonesia’s dependence on fossil fuel imports and to reduce its emissions from fossil fuels. To implement the mandatory policy, the production of palm oil-based biodiesel (FAME: fatty acid methyl ester) was increased to meet both domestic and export demand (Figure 1.6).
The volume of Indonesian palm oil exports has increased sharply in the past several years in line with the increase in production. Indonesia’s palm oil exports, which totaled 15 million tons in 2008, increased sharply to 25 million tons (CPO equivalent) in 2016 (Figure 1.7). The sharp increase in the volume of Indonesia’s palm oil exports has also changed the composition of export products.
The policy to promote the domestic downstream palm oil industry has successfully improved the composition of Indonesia’s palm oil exports from mostly CPO to mostly processed palm oil products. In 2008, CPO accounted for about 55 percent of Indonesia’s palm oil exports. In 2016, the figure underwent a major change as the share of the processed palm oil products in total palm oil exports increased sharply to 78 percent (Figure 1.8).
Indonesia’s palm oil exports have generated a significant amount of foreign exchange for the national economy. CPO and derivative products have made a significant contribution to the country’s non-oil exports and the country’s economy as a whole. The export value of CPO and its derivative products (Figure 1.9) increased sharply from US$15.4 billion in 2008 to $21.6 billion in 2011. However, because of a decline in global CPO prices, the export value dropped to $18.1 billion in 2016.
With its high export value, palm oil has become the largest export commodity in the country. From the standpoint of economic development, the foreign exchange generated from palm oil exports is more sustainable and beneficial for the economy because (1) it is produced from oil palm plantations in 190 districts in Indonesia, (2) about 41 percent is produced by smallholder oil palm plantations, (3) there is an increase in processed products from the domestic downstream industry and (4) it is produced through plantation owners’ own efforts as they do not receive subsidies from the government.
Myths Vs. Facts of Palm Oil in Global Vegetable Oil Competition
The development of palm oil around the world especially in Indonesia has led to an increase in global competition among vegetable oils. Soybean oil, sunflower oil and rapeseed oil that previously dominated the world vegetable oil market have had to face head-to-head competition from rapidly growing palm oil not only in terms of production and but also in consumption. Various forms of unfair competition through negative and even black campaigns have been carried out against palm oil since the early 1980s.The revolution in the development of Indonesia’s palm oil has attracted the attention of the global community. The change in the position of palm oil to become the world’s main vegetable oil replacing soybean oil, which had dominated the world’s vegetable oil market for more than 100 years, has triggered a new dynamic in global vegetable oil competition.
Various forms of campaigns have been launched by exploiting social, economic and global environmental issues against palm oil plantations in the world, especially in Indonesia. Various social, economic and environmental issues related to the development of the Indonesian palm oil industry that will be described below have become the topics of discussion both around the world and in Indonesia
This chapter presents some of the myths that palm oil competitors have raised as part of this negative campaigning.
Myths & Facts Chapter (1-2)