A negative side-effect of palm oil production - apart from its impact on people's health due to the high level of saturated fat - is that the palm oil business is a key driver of deforestation in countries such as Indonesia and Malaysia. Indonesia is the world's largest producer and exporter of palm oil but it is also the largest greenhouse gas emitter after China and the United States.

Global palm oil production is dominated by Indonesia and Malaysia. These two countries, together, account for around 85 to 90 percent of total global palm oil production. Indonesia is the largest producer and exporter of palm oil worldwide.

Over the long term, global palm oil demand shows an increasing trend as an expanding global population gives rise to rising consumption of food and cosmetic products that contain some sort of material that is derived from palm oil. Meanwhile, various governments across the globe encourage the use of biofuel.

Estimated Global Palm Oil Production in 2016:

Country    Production
(in metric tons)
Indonesia    36,000,000
Malaysia    21,000,000
Thailand     2,200,000
Colombia     1,320,000
Nigeria       970,000
World    58,800,000

Source: Index Mundi

Palm Oil in Indonesia

Indonesian Palm Oil Production and Export

Few Indonesian industries have shown such robust growth as the domestic palm oil industry during the past 20 years. This growth is reflected by the country's rapidly rising production and export figures as well as by the growing quantity of its palm oil estate area. Driven by increased global demand and higher yields, palm oil cultivation has been expanded significantly by Indonesian farmers and conglomerates (at the expense of the environment and at the expense of production figures of other agricultural products such as cocoa or coffee because farmers switched to palm oil plantation due to the promising perspectives).

The majority of Indonesia's palm oil output is exported. The most important export destination countries are China, India, Pakistan, Malaysia, and the Netherlands. Although the numbers are very insignificant, Indonesia also imports some palm oil, primarily from India.

Indeed, the majority of Indonesian palm oil is exported (see table below). However, due to Indonesia's expanding population (as well as rapidly expanding middle class) and the government's support for biodiesel, domestic palm oil demand in Indonesia is growing as well. Rising domestic palm oil demand could in fact mean that crude palm oil (CPO) shipments from Indonesia will stagnate in the years ahead if the government remains committed to the moratorium on conversion of peat-land (read more below).

Indonesian Palm Oil Production and Export Statistics:

  2008 2009 2010 2011 2012 2013 2014 2015 2016
(million tons)
 19.2  19.4  21.8  23.5  26.5  30.0  31.5  32.5  32.0
(million tons)
 15.1  17.1  17.1  17.6  18.2  22.4  21.7  26.4  27.0
(in USD billion)
 15.6  10.0  16.4  20.2  21.6  20.6  21.1  18.6  18.6
Plantation Size
(in million ha)
  n.a.   n.a.   n.a.   n.a.   9.6  10.5  10.7  11.4  11.8

Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture

The table above shows production of palm oil has grown rapidly in Indonesia over the past decade. The Indonesian Palm Oil Association (Gapki) stated that its target is to see Indonesia producing at least 40 million tons of CPO per year from 2020.

Indonesia's oil palm plantation and processing industry is a key industry to the country's economy: the export of palm oil is an important foreign exchange earner while the industry provides employment opportunities to millions of Indonesians. In terms of agriculture, palm oil is the most important industry of Indonesia contributing between 1.5 - 2.5 percent of the nation's gross domestic product (GDP).

Almost 70 percent of Indonesia's oil palm plantations are located on Sumatra where the industry was started during the Dutch colonial days. The remainder - around 30 percent - is largely found on the island of Kalimantan.

1. Sumatra
2. Kalimantan

In terms of geography, Riau (Sumatra) is the leading palm oil producer in Indonesia, followed by North Sumatra, Central Kalimantan, South Sumatra, and West Kalimantan.

According to data from Indonesia's Statistics Agency (BPS) the total area of oil palm plantations in Indonesia is currently around 11.9 million hectares; a figure that is about three times higher than in the year 2000 when around four million hectares of Indonesian soil was used for palm oil plantations. This figure is expected to increase to 13 million hectares by the year 2020.

State-owned enterprises play a very modest role in the Indonesian palm oil sector as they own relatively few plantations. Meanwhile, big private enterprises (for example, the Wilmar Group and Sinar Mas Group) are dominant, producing slightly over half of total Indonesian palm oil output. Smallholder farmers account for around 40 percent of total production. However, most of these smallholder farmers are highly vulnerable to global downswings in palm oil prices as they cannot enjoy the cash reserves (or bank loans) that the big planters have at their disposal.

Who Own the Palm Oil Plantations in Indonesia?

Big Indonesian companies (for example Unilever Indonesia) have invested heavily in recent years to expand palm oil refining capacity. This is in line with the government's ambition to extract more revenue from Indonesia's natural resources. The country has always been mainly focused (and dependent) on the export of raw palm oil (and other raw commodities) but over the past decade authorities have shifted their priority to refined products, higher up in the value chain, which also form a buffer in times of sliding palm oil prices. Palm oil refining capacity in Indonesia is understood to have jumped to (an annual) 45 million tons by the start of 2015, up from an 30.7 million in 2013, and more than double the 21.3 million in 2012.

The Government's Palm Oil Tax Policy

To spur growth in the downstream palm oil industry, the export tax on refined palm oil products has been slashed in recent years. Meanwhile, the export tax for CPO ranges between 0 and 22.5 percent depending on the international palm oil price. Indonesia has an ‘automatic mechanism’ that when the government benchmark CPO price (based on international and local CPO prices) drops below USD $750 per metric ton, the export tax is cut to zero percent. We saw this zero percent export tax policy for CPO between October 2014 and May 2016 when the benchmark price was below the USD $750 per ton threshold.

Problematically, the zero percent export tax for CPO meant the government missed out on a big chunk of much-needed tax revenue from the palm oil industry. Therefore, it decided to introduce palm oil export levies in mid-2015. Through this new policy the government imposed a USD $50 per metric ton levy on crude palm oil exports, and a USD $30 per metric ton levy exports of processed palm oil products. Proceeds from these new levies are (partly) used to finance the government's ambitious biodiesel subsidy program.


What are the five factors that influence palm oil prices?

(1) supply & demand
(2) prices of competing vegetable oils (especially soybeans)
(3) weather conditions
(4) import policies of importing countries
(5) changes in taxation and export-import duties


In February 2015 the Indonesian government announced to raise biofuel subsidies from IDR 1,500 per liter to IDR 4,000 per liter in a bid to protect domestic biofuel producers. Through this biodiesel program the government wants to compensate these producers for the price differences between regular diesel and biodiesel that occurred due to low global petroleum prices (since mid-2014). Besides funding these subsidies, proceeds from the new export levies will also be channeled to replanting, research and the development of human resources in Indonesia’s palm oil industry.

Environmental Issues of Indonesian Palm Oil Plantations

Indonesia is often criticized by environmentalist groups for giving too much room for palm oil plantation development (resulting in deforestation and destruction of carbon-rich peat lands). However, as more and more international companies are seeking to purchase sustainable palm oil that meets the criteria of the Malaysia- based Roundtable on Sustainable Palm Oil, Indonesian plantations and the government need to enhance their 'green-policies'. Western governments (the European Union is a good example) are also creating stricter legislation regarding imported products containing palm oil, thus stimulating the production of sustainable palm oil.

In 2011 Indonesia established its own Indonesian Sustainable Palm Oil (ISPO) which aims to enhance the global competitiveness of Indonesian palm oil and brings it under stricter environmental legislation. All Indonesian palm oil producers are now compelled to receive ISPO certification. However, this local palm oil sustainability scheme is not internationally recognized.

Moratorium on New Virgin Forests Concessions

The government of Indonesia signed a two-year primary forest moratorium that came into effect on 20 May 2011. It has been extended twice, once by the Susilo Bambang Yudhoyono administration and twice by the Joko Widodo administration. This moratorium implies a temporary stop to the granting of new permits to clear rain forests and peat lands in the country. In exchange Indonesia received a USD $1 billion package from Norway. On several occasions international media have reported that the moratorium has been breached by Indonesian companies. It has succeeded, however, in limiting - although temporarily - expansion of Indonesia's palm plantations. Skeptics of the moratorium point out that prior to its implementation the government had already concessioned around nine million hectares for new crops. Moreover, the large palm oil companies possess wide land banks, many of which are only half planted, meaning that there is still ample room for expansion.

In mid-2016 Indonesian President Joko Widodo proposed to issue a five-year moratorium on new palm oil plantation concessions in an attempt to safeguard a healthy and sustainable environment. This was felt necessary after there was fierce international criticism on Indonesia's weak environmental policies. The massive forest fires on the Indonesian islands of Sumatra and Kalimantan that occurred between June and October 2015 were among the worst (man-made) natural disasters ever recorded. Moreover, toxic haze spread to other parts of Southeast Asia.

A study published in Scientific Reports says these forest fires released approximately 11.3 million tons of carbon each day (a figure that exceeds the 8.9 million tons of daily carbon emissions in the European Union). According to the World Bank, it cost Indonesia losses of IDR 221 trillion (approx. USD $16 billion or 1.9 percent of the country's gross domestic product).

In the June-October 2015 period more than 100,000 forest fires destroyed about 2.6 million hectares of land. Traditionally, Indonesian farmers use slash and burn practices to clear forest for the expansion of palm oil and pulp & paper plantations. Although such practices are illegal, Indonesia's weak law enforcement facilities such destruction of the environment.

Widodo does not want to limit the expansion of Indonesia's palm oil sector. Instead, he wants to see the productivity of existing plantations being boosted by using more efficient farming techniques and seeds as well as the replanting of new trees (rejuvenation), rather than simply add new land.

Future Prospects of the Indonesian Palm Oil Industry

The 2000s commodities boom was a blessing for Indonesia due to the country's abundance of natural resources. Palm oil prices rose steeply after 2005 but the global crisis led to a sharp decline in CPO prices in 2008. There emerged a solid rebound, but after 2011 CPO prices fell to low territory again, particularly as demand from China dropped, while low petroleum prices (since mid-2014) curtail demand for palm-based biofuels. As such, the palm oil industry's prospects are gloomy for the foreseeable future, especially as Indonesia is still too dependent on crude palm oil, instead of refined palm oil products. On the other hand, considering the government is eager to curb expansion of palm oil plantations, existing palm oil players become more valuable.

Regarding the long term the palm oil industry remains lucrative for the following reasons:

Big profit margins, while the product is simple to produce.
Large and increasing international demand
Crude palm oil (CPO) production costs in Indonesia are the lowest worldwide
Higher rates of productivity compared to other edible oil products
Bio-fuel is expected to increase its significance at the expense of gasoline

What are matters that hamper development of Indonesia's palm oil industry?

Awareness of the need for more environment-friendly policies
Land disputes with local communities due to a lack of clarity regarding land ownership
Indonesia is known for its legal and regulatory uncertainty
High logistics cost due to the lack of quality and quantity of infrastructure

Updated on 26 June 2017