As crude palm oil prices fell below the government’s USD $750 per metric ton threshold (which is calculated using international and local CPO prices) in September 2014, the Indonesian government implemented a zero percent export tariff for palm oil exports the following month (and which is still in place today). Such duty-free palm oil exports aim to boost global demand and prices. Indonesia is the world’s largest producer and exporter of palm oil.

However, duty-free CPO exports also mean that the Indonesian government has been unable to collect revenue from palm oil exports since October. This is problematic as the government is in need of additional funds to achieve its ambitious economic development targets. Palm oil is one of the most important foreign exchange earners of Indonesia.

In order to obtain state revenue from CPO exports, the government thus needs to revise its CPO tax policy. Previously it had been speculated that the government would lower its USD $750 per ton threshold as this would make it possible for the government to set a CPO export tariff despite current low CPO prices. However, the government came up with another solution to the problem. It plans to introduce a USD $50 per metric ton charge on CPO shipments when CPO prices are below the USD $750 per ton threshold. These funds will then be channeled to the government’s biofuel subsidy program. However, when CPO prices exceed the USD $750 per ton threshold, then a CPO export tax is reintroduced (which can go up as high as 22.5 percent when CPO prices surge far above the USD $750 per ton threshold), while the USD $50 per ton levy is scrapped.

In early February the Indonesian government announced that it would increase biofuel subsidies from IDR 1,500 per liter to IDR 4,000 per liter in a move to support the domestic biofuel industry (which has been plagued by low crude oil prices). Last week, the government announced that it will raise the ethanol content requirement in (palm oil-derived) biodiesel to 15 percent (from 10 percent currently) in a move to reduce imports of diesel fuel.

Read Column: Palm Oil Update Indonesia: Subsidies for Biofuel to Lift CPO Prices

Indonesian President Joko Widodo, who is currently on state visits abroad, still needs to approve the CPO levy. Widodo will return to Indonesia on 30 March 2015. It is expected that the new palm oil export measure will be implemented rapidly after Widodo’s return.

Indonesia’s zero percent export tariff policy was implemented one month after Malaysia, the world’s second-largest palm oil grower and exporter, decided to scrap export duties for this commodity. However, Malaysia’s palm oil export tax has been raised from zero to 4.5 percent for April, effectively ending the duty-free policy that had been in place in Malaysia since September 2014. Benchmark Malaysian palm oil futures plunged over a fifth during 2014. On Friday, they ended at 2,160 ringgit (about USD $579) per ton.

Indonesian CPO production is expected to rise to 31.5 million tons in 2015 (from 31 million tons in the preceding year), while CPO exports are expected to fall to 19.5 million tons.

Indonesian Palm Oil Production and Export:

    2008   2009   2010   2011   2012   2013   2014   2015¹
(million metric tons)
  19.2   19.4   21.8   23.5   26.5    27.0    31.0    31.5
(million metric tons)
  15.1   17.1   17.1   17.6   18.2    21.2    20.0    19.5
(in USD billion)
  15.6   10.0   16.4   20.2   21.6    19.0      

¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture