Franky Oesman Widjaja, Chairman of Sinar Mas Agribusiness & Foods, expects Indonesia's crude palm oil production in 2016 to drop by 5-10 percent (y/y) due to the impact of the El Nino weather phenomenon that brought extreme dry weather to Southeast Asia in 2015. However, in several Indonesian regions palm oil plantations are now being plagued by floods giving rise to speculation whether El Nino is to be followed by La Nina. La Nina - the opposite of El Nino - brings cooler than average sea temperatures in the central and eastern tropical Pacific Ocean causing wetter-than-usual weather in Southeast Asia.
At the Responsible Business Forum on Food and Agriculture, held last Monday (25/04) in Jakarta, Widjaja said his prediction that Indonesia's crude palm oil (CPO) output will drop by about 5 - 10 percent in 2016 (due to the impact of El Nino) excludes the possible impact of La Nina in the second half of 2016. Currently, Widjaja already detected wetter-than-usual conditions in several Indonesian regions (causing floods). As such, if there will indeed occur a full blown La Nina later this year, then Indonesia's CPO output may decline by more than 10 percent.
Widjaja added that the nation's CPO output could have plunged more dramatically if plantations had not planted new oil palm trees in recent years. Without the younger generation of trees CPO output could have dropped up to 20 percent in 2016.
Regarding palm oil production of Sinar Mas, output is expected to drop by 15 percent (y/y) in 2016 from 3 million tons in 2015. This decline would be higher than the estimated overall decline of Indonesia's CPO output because the plantations of Sinar Mas are located in the areas of Sumatra and Kalimantan that have been affected by drought and haze.
Regarding the moratorium on new palm oil concessions, Widjaja says it is a good idea particularly because Indonesia needs to create a more orderly palm oil sector. Moreover Widjaja says there is plenty of room to enhance palm oil production without adding new plantations. In mid-April 2016 Indonesian President Joko Widodo ordered Indonesia's Minister of Environment and Forestry Siti Nurbaya to issue a moratorium on new palm oil concessions in a number of provinces. Although Widodo wants Indonesia to raise CPO output, he believes this increase can be achieved by increasing productivity of existing palm oil plantations, not by adding new ones.
However, regarding the long-term, the world population will number about 9.6 billion people by the year 2050, implying around 200 million tons of edible oils (such as soybean oil or CPO) are needed to meet global demand. To produce 200 million tons of CPO, he estimates that it requires around 40 million hectares of oil palm plantations.
Previously, the Indonesian Palm Oil Producers Association (Gapki) said it expects Indonesia's CPO output in 2016 to fall 5 percent (y/y) to 31 million tons. In 2015 CPO output in the world's largest palm oil grower and exporter reached 32.5 million tons in 2015, up 3 percent from output in the preceding year. Gapki objects to the moratorium and request the government to re-study this plan because it will impact negatively on Indonesia's palm oil industry, one of the country's key foreign exchange earners and a sector that provides (directly and indirectly) employment to 20 million Indonesians.
Besides the El Nino weather phenomenon, large parts of Sumatra and Kalimantan were plagued by man-made fires between June-October 2015. The severe haze that was brought about by these fires disturbed the photosynthesis process of the oil palm trees hence curbing CPO output.
Indonesian Palm Oil Production and Export Statistics:
(in USD billion)
¹ indicates forecast
Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture