The oil pam plantations stand as the primary segment of the Indonesian palm oil industry’s supply chain system.

Indonesia’s oil palm plantations, consisting of plantations owned by state-owned companies (BUMN), private companies and smallholders, produce around 50 million tons of crude palm oil (CPO) and palm kernel oil (PKO) (Gapki, 2019). The total production is used to feed the downstream industries to produce a variety of processed products, which are then sold at domestic market and also exports.

If we want to talk about the sustainability and continuity of Indonesia’s palm oil industry, we have to start it from the upstream segment. The competitiveness in the upstream sector will determine its competitiveness in the downstream sector.

In other words, the main goal should be to ensure competitiveness throughout the whole supply chain, from upstream to downstream sectors. Here is the advantage of Indonesia’s palm oil industry, which derives all raw materials at home. An industry that can ensure own raw materials will be more resilient than the industries which have to import raw materials from other countries.

Not yet fully recovered from the sluggish market during 2018-2019, actually in early 2020 the palm oil industry saw a rising hope. But then the Coronavirus (Covid-19) pandemic had changed the condition and the year 2020 turned into a new cycle of sluggish market.

During the Covid-19 pandemic, the oil palm plantations have been continually operating normally. The Covid-19 preventive protocol has been implemented with strict discipline in plantations areas and residential areas of employees. Normally, the plantations’ works are not undertaken in groups. Harvesting and maintaining works are conducted separately by each worker.

For example, every harvester is assigned to harvest a plantation area of 4 ha individually. The same case applies with the maintaining work and the operation of the palm oil mills. The works that are potentially undertaken in groups, such as administration, are reduced up to 50 percent to meet the requirement of physical distancing. Workplaces, mills, and residential areas are restricted for outsiders.

Actually, the oil palm plantation companies are the first ones to encourage employees no to go “mudik” (traveling to own native places) for celebrating the Idul Fitri. The employees who have to go “mudik” had to be well recorded for getting special treatment. It is aimed to prevent the infection of the pandemic. Such way is considered effective in preventing the spread of the Covid-19 pandemic in the oil palm plantations. Until now, there has been no report of confirmed positive case of Covid-19 in the oil palm plantations.

How about post Covid-19?

The Covid-19 pandemic is not gone yet, and its potential infection still persists. Therefore, the future operation of oil palm plantations has to be changed. But the change and improvement in the oil palm plantations in the future should not be solely driven by the Covid-19 pandemic, but more by the market demand.

The Covid-19 pandemic should drive the oil palm plantations into a condition that will force the industry to change faster because of the market competition. The CPO and derivative products are facing a market condition that is more competitive and complex. It is more competitive as it has to compete with other vegetable oils, such as soybean, rapeseed, sunflower, and others which are competing to get bigger market shares in the consuming countries. It is more complex as trading of vegetable oils involves political interests so that palm oil trading has to deal with various kinds trade barriers created by the countries that produce the other vegetable oils as the competitors of palm oil.

Facing such challenge, the oil palm plantations have only one choice, which is to become more productive and more efficient. One factor causing the palm oil superior until now is the fact that it has a low cost of production due to its higher productivity compared to other vegetable oils. The oil palm plantations have a productivity rate of 3.94 tons of CPO per hectare per year, as compared to soybean at 0.53 ton/ha/year, rapeseed 0.79 tons/ha/year, sunflower at 0.81 ton/ha/year (Oil World, 2018).

In fact, the palm oil commands various consumer markets in Europe, the United States, Africa and Asia due to its cheap prices. The palm oil superiority has been proven by the fact that the use of palm oil has been continually increasing in many foreign countries, despite of being continually attacked with negative campaigns and hindering regulations.

But such comparative advantage cannot be maintained for too long. The palm oil production cost has been continually rising from year to year. As the palm oil industry is a labor intensive one, its labor cost has been rising by almost 10 percent every year because of the wage regulations in Indonesia. Production cost (contributed by fertilizers, energy, and machineries) has been also consistently increasing every year. Its advantage in productivity is not in line with its production cost.

The production cost of palm oil in Indonesia ranges between US$500 and 600/ton. It has increased significantly if compared to that of 2015 at around US$355/ton (listed companies’ annual reports, 2015). If compared to the production costs of other vegetable oils, the oil palm plantations are less efficient. For example, the production cost of sunflower in Ukraine is US$163/ton, rapeseed in Germany at US$234/ton, while soybean in Brazilia at US$ -538/ton (James Fry, 2015). The production cost of soybean is minus because its feed products as side products have selling prices, which can compensate the production cost of soybean oil as the main product.

But the price of the commodities is predicted to have a tendency to decline at the global market. At least, the data during the last 20 years had shown that the price of palm oil had been continually fluctuating. In 2019 the price of palm oil had once dropped to US$494/ton, which was below its production cost. The oil palm plantations should quickly adjust to the market condition and development.

What should be done?

The oil palm plantation companies should evaluate their current operations, which fully rely on manpower in operating the oil palm plantations. Replacing them with the use of technology is a must. The oil palm plantations will lose market competition if every harvester can only harvest a plantation area of 4 ha, while soybean harvester can harvest an area of 80 – 100 ha mechanically.

The oil palm plantations have no need to wait for so long to harvest, as currently they can be harvested at the age of 20-25 months. The late start of harvesting causes inefficiency and cost of investment. Productivity per hectare should be strictly maintained, and there should be no land area unused and no oil palm tree without having maximum fruit bunches.

Certainly, the solutions for all of these are the research and technology. The fertilizer as the production factor that needs biggest cost should be made more effective and efficient. Until now, 30-40 percent of every fertilization is estimated gone because of inappropriate process, and weather factor that is too dry or too wet.

Currently, the oil palm plantations still rely on the colonial system on its field control, meaning that it needs physical attendance to supervise the field of operation and to ensure that all works are implemented as planned.

Although the technology of remote sensing and drone has been employed in the oil palm plantations, but such use of technology is not yet massive and brings no impact to the efficiency and effectiveness of the industry. Manual counting and monitoring badly need manpower in big quantity with less accuracy due to human errors. For example, counting the fresh fruit bunches in every oil palm tree to estimate production and counting trees damaged by pests take a long time to accomplish with expensive labor cost and with unsatisfactory results.

The oil palm plantations, which are all located in Kalimantan, Sumatera, Sulawesi, and Papua, are almost all controlled from their headquarters in Jakarta. The system of works reporting is also part of the cost that should be made efficient. Fast, accurate and real time reporting is now demanded to allow the process of taking decisions undertaken quickly and appropriately. For such purpose, it is now time to apply the digitalization system in the oil palm plantations.

All of these will become parts of the new normal in operating the oil palm plantations. Reducing manual works and human movements are in short term potential to stem the spread of Covid-19 pandemic. But in the long term, many works that cost highly should be replaced soon with the use of technology, so that the industry will be more effective, more productive and more efficient. Practices of sustainability in the oil palm plantations will increase competitiveness. This is the key for the future of oil palm plantations, which should be competitive and sustainable, so that it can win the competition at the increasingly more complex global market. (*)

Joko Supriyono
The Indonesian Palm Oil Association (GAPKI) chairman