The rejuvenation of oil palm trees should lead to rising yields. Although Indonesia is the world's biggest producer and exporter of palm oil, rivaling CPO producing nations show higher productivity per hectare. This is caused by Indonesia's overall non-optimal farming techniques and the use of weak seedlings. Moreover, around 40 percent of Indonesia's total palm oil plantations are owned by smallholder farmers, meaning that they have limited funds available to invest in the rejuvenation of trees or better technology.

The new government program - covering 20,000 hectares of smallholder plantations in the first phase - has a limited scope, however. It is estimated that a total of around 2.4 million hectares of Indonesian palm oil plantation is in need of replanting, while 400,000 hectares of crops are considered "old". Indonesia has a total of 11.9 million hectares of palm oil plantation, mostly located on Sumatra and Kalimantan.

Still, it is an important program because yields of the rejuvenated trees should grow four-fold. Currently, smallholder plantations yield two tons of CPO per year. However, yields can grow to eight tons per year provided trees are replanted using better seedlings. The new seedlings should start producing within a two-year period.

The replanting program is financed through the CPO levy mechanism. Amid low palm oil prices (implying the country's export tax was scrapped to zero) the Indonesian government decided to introduce palm oil export levies in mid-2015. Through this policy the government imposed a USD $50 per metric ton levy on CPO exports, and a USD $30 per metric ton levy on exports of processed palm oil products. Proceeds from these levies are also used to finance the government's ambitious biodiesel subsidy program. As the palm oil price has already risen, the traditional export tax also kicked back in (last year).

Those smallholder farmers who want to participate in the program have to comply with the requirements that are set within the Indonesian Sustainable Palm Oil (ISPO) certification. ISPO certification, which is mandatory for palm oil companies but voluntary for smallholders, shows that land is legally owned, does not violate boundaries of forest areas and uses good agriculture practices (no slash-and-burning methods).

Read more: Analysis of Indonesia's Palm Oil Sector

Indonesian President Joko Widodo launched the new government program in Lampung (South Sumatra) last week.

Meanwhile, palm oil industry veteran and Director at Godrej International Ltd. Dorab Mistry said CPO production in Indonesia and Malaysia - the world's top two growers - will fall slightly below initial expectations in 2017. This should help palm oil prices extend the rally that has been seen in the second half of 2017. CPO demand from India is particularly strong at the moment on the back of the Dussehra and Diwali festivals between September and November.