Riset Perkebunan Nusantara, a state-owned research firm, expects Indonesia's crude palm oil (CPO) production to drop 4.2 percent (y/y) to 32 million tons in 2016. The firm further adds that in 2015 Indonesia had a total of 11.3 million hectares of palm oil plantation, consisting of plantations owned by the state (750,000 hectares), plantations owned by the private sector (5.97 million hectares) and plantations owned by smallholders (4.58 million hectares). The palm oil sector is one of Indonesia's key foreign exchange earners. Indonesia is the world's largest producer and exporter of palm oil, followed by Malaysia.
Production of fresh fruit bunches (FFB) in Indonesia fell 10 percent in the first quarter of 2016. This caused production of crude palm oil (CPO) to be curbed by around one percent in Q1-2016 compared to CPO production in the same period one year earlier. Despite there is approximately one million hectares of newly planted oil palm trees that start to become productive, research firm Riset Perkebunan Nusantara (RPN) expects Indonesia's CPO output to decline to 32 million tons in full-year 2016. Slipping output is caused by El Nino-inflicted dry weather and the toxic haze that both occurred in 2015.
Hasril Hasan Siregar, Head of Palm Oil Research at RPN, informed reporters on Tuesday (19/04) that in the first half of 2015 the northern part of the island of Sumatra was plagued by unusual dry weather. This was followed, in the second half of 2015, by unusual dry weather in the parts on Sumatra that are located below the equator (Riau, Jambi, South Sumatra, Lampung) as well as on the island of Kalimantan. The islands Sumatra and Kalimantan are Indonesia's main palm oil producing regions. Oil palm trees need plenty of water in order to optimize production and therefore a serious drought curtails output considerably. The El Nino weather phenomenon that occurred in 2015 and 2016 was the most severe El Nino of the past 20 years (El Nino, which can cause a dry spell in Southeast Asia, occurs every five years on average although sometimes its presence is hardly felt).
The severe forest forest that occurred on parts of Sumatra and Kalimantan between June-October 2015 (and were responsible for spreading toxic haze across a wide part of Southeast Asia) are also to blame for curbed palm oil production in 2016. Due to people's traditional slash-and-burn practices (for the development of palm oil and pulp & paper plantations) more than 100,000 man-made fires destroyed 2.6 million hectares of Indonesian land. The World Bank estimated that costs went up as high as IDR 221 trillion (approx. USD $16 billion, or 1.9 percent of Indonesia's gross domestic product). The toxic haze that was caused by these fires disturbed the photosynthesis process and therefore leads to reduced output.
Last week it was reported that Indonesian President Joko Widodo urged Indonesia's Minister of Environment and Forestry Siti Nurbaya to issue a moratorium on new palm oil concessions. Although Widodo wants Indonesia to raise CPO output, he believes that production growth can be achieved by enhancing productivity of the existing palm oil plantations, not by adding new plantations. Indonesia is often criticized by environmentalist groups for its forestry policies and poor law enforcement. However, according to Riset Perkebunan Nusantara it is necessary to add palm oil plantations to compensate for lower palm oil output that occurs at existing plantations that are subject to rejuvenation projects (re-planting). If the moratorium is indeed imposed then Indonesia will not achieve its 43.4 million CPO output target in 2024 according to RPN. However, RPN remains neutral about the moratorium and adds that lower CPO output would cause higher palm oil prices.
Hasril Hasan Siregar expects Indonesia's palm oil output to improve in the second half of 2016 because the trees are now starting to recover from the drought and haze.
Indonesian Palm Oil Production and Export Statistics:
(in USD billion)
¹ indicates forecast
Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture