Apkasindo Secretary General Asmar Arsjad said about 60 percent of palm oil estates owned by Indonesia's smallholder farmers are dominated by aging trees (with an age between 20 - 30 years), implying that productivity of the trees is weak. Contrary to the El Nino or La Nina weather phenomenons that only bring a temporary decline in productivity of the trees, the weak productivity of aging trees is structural and therefore needs to be dealt with in order to safeguard the country's palm oil supplies (palm oil is a key foreign exchange earner for Indonesia) as well as the welfare of the nation's smallholder farmers. Smallholder farmers account for approximately 40 percent of total palm oil production in Indonesia. Most of these smallholders are highly vulnerable to global downswings in palm oil prices.

Arsjad adds that the requirements for smallholder farmers to be eligible for the government-supported oil palm rejuvenation program through the BPDP-KS are relatively tough. For example, farmers have to show land title documents, while land ownership in the rural areas of Indonesia is usually not carefully dealt with in terms of legal documentation.

Data from the Agriculture Ministry of Indonesia shows that the total size of the nation's palm oil plantations totaled 10.75 million hectares in 2014, and rose to 11.30 million hectares in 2015 (consisting of 4.58 million hectares of smallholder palm oil plantations). On average, Indonesia's palm oil plantation size has risen by 6.15 percent each year in recent history.

Moratorium on New Palm Oil Concessions

In April 2016 it was reported that Indonesian President Joko Widodo ordered Environment and Forestry Minister Siti Nurbaya to issue a moratorium on new palm oil concessions in a number of Indonesian provinces. Widodo wants Indonesia to continue raising its CPO output. However, he believes such growth can be achieved by increasing productivity of existing palm oil plantations, not by adding new plantations. This message was warmly welcomed by environmentalist groups that often criticize Indonesia for its poor forestry policies and poor law enforcement (which was partly to blame for the severe forest fires and haze that spread through Southeast Asia last year).

However, the nation's top officials and stakeholders in the palm oil industry have not received an outline of this moratorium yet. Chief Economic Minister Darmin Nasution also confirmed that the moratorium has not yet been discussed yet.

Palm Oil Price

Meanwhile, palm oil futures in Malaysia touched their lowest level in almost three months at the start of the week due to a stronger ringgit and losses in Chinese vegetable oils. August palm oil shipments on the Bursa Malaysia Derivatives Exchange declined 1.4 percent to 2,492 ringgit (approx. USD $605) per ton on Monday (23/05).

Over the past couple of months palm oil prices have been rising on curbed palm oil output in Indonesia and Malaysia - the world's biggest palm oil producers - due to El Nino-inflicted drought and the impact of the toxic haze that was caused by man-made forest between June-October 2015 (disturbing the photosynthesis process of the trees). Meanwhile, analysts are increasingly speculating that La Nina will trigger wetter-than-usual weather in the second half of 2016 and this could curb palm oil output further, implying upward price pressure. Moreover, Indonesia is expected to raise consumption of palm oil on the back of the government's ambitious biodiesel program.

Due to the recently rising trend of palm oil prices the Indonesian government finally reintroduced its palm oil export tax in May 2016. This tax was scrapped in October 2014 because of the low palm oil price. The government uses the level of USD $750 per ton as the level that separates taxable from non-taxable shipments (however this reference price is different from the one used by the Bursa Malaysia Derivatives Exchange).

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   31.0¹
(million tons)
  15.1   17.1   17.1   17.6  18.2   22.4   21.7   26.4   25.0¹
(in USD billion)
  15.6   10.0   16.4   20.2  21.6   20.6   21.1   18.6   17.0¹

¹ indicates forecast
Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture