http://asia.nikkei.com/Politics-Economy/Economy/Cargill-warns-on-Indonesian-palm-oil-curbs
President-elect Joko Widodo and wife iriana after voting in the 2014 presidential elections, in central Jakarta (Photo: Simon Roughneen)
JAKARTA — One of the world’s largest agribusinesses has warned that Indonesia’s proposal to lower the cap on foreign ownership of oil palm plantations from 95% to 30% will deter foreign investment in the industry. Indonesia is the world’s biggest producer and exporter of palm oil, which is a major part of its resource-driven economy.
John Hartmann, CEO of Cargill Tropical Palm Holdings, told the Nikkei Asian Review that a draft bill proposing the curbs came as a surprise and said his company hopes the Indonesian parliament will reconsider the move.
“The bill will literally reduce the level of foreign investment in Indonesia’s plantation sector. This will likely impact Indonesia’s adoption of globally accepted sustainable palm oil practices (and) its attractiveness for foreign investments in general, as well as the advancement of local communities in rural areas,” Hartmann said.
He called for talks on the issue, adding: “We welcome opportunities to offer an industry viewpoint in any discussions the parliament plans to hold on possible amendments to the bill.”
Cargill owns and operates three plantations in Indonesia — Harapan Sawit Lestari and Indo Sawit Kekal in West Kalimantan, and Hindoli in South Sumatra. The plantations cover around 420 sq. km and employ more than 10,000 people.
Keeping up with demand
Palm oil accounted for 11% of Indonesia’s export earnings in 2012, and exports rose to their highest level in seven months in July, according to the Indonesian Palm Oil Association, also known by its local initials as Gapki.
The world market for palm oil has more than doubled since 2000, according to the United Nations Food and Agriculture Organization. The World Bank has said that an extra 63,000 sq. km of palm plantations will be needed to meet global demand by 2020.
The draft bill would give the domestic oil palm sector protection from increased foreign competition as Indonesia seeks to increase production to 40 million tons a year by 2020 — double its output in 2009.
However, a law passed in 2013 that limits new plantations to 1,000 sq. km has raised doubts among larger local producers that the 2020 target can be met. Big plantation owners argue that smaller landholdings are less efficient because they are unable to profit from economies of scale.
Many Indonesian plantations are very small, often amounting to fewer than 0.5 sq. km run by a single farming family. Cargill alone says it works with more than 14,000 small-scale farmers with combined landholdings of just 290 sq. km.
According to a 2012 report by consultancy PricewaterhouseCoopers, such small landholders account for about 38% of Indonesia’s palm oil plantations, with 54% privately owned and the remainder held by state-owned groups. The total area of the country’s palm plantations came to about 90,000 sq. km as of 2013, according to a report this year by the U.S. Department of Agriculture.
Abah Ofon, a commodities analyst with Standard Chartered Bank in Singapore, said the draft bill, if passed, would help Indonesian producers to close a long-standing efficiency gap with neighboring Malaysia, which produces about 40% of global output, compared with Indonesia’s 45%.
“Indonesian crude palm oil players should benefit from these new measures by having greater access to land suitable for planting oil palms. We have already seen a significant improvement in capacity and yields in Indonesia, and it is likely that this trend will continue in such a way that capacity and capability deficits between Indonesia and Malaysia are reduced substantially,” Ofon said.
Protectionism versus pragmatism
The draft palm oil bill highlights a growing mood of protectionism in Indonesia, coming after measures implemented by the outgoing government of President Susilo Bambang Yudhoyono that restrict foreign companies’ activities in the mining sector. Mining companies have been banned from exporting ores since January in a move the government said is aimed at increasing domestic processing.
In a recent interview with the Nikkei Asian Review, Indonesian Finance Minister Chatib Basri denied that such measures, including the move to restrict foreign ownership of palm oil plantations, amounted to economic nationalism, as critics claim.
“I am very happy to provide tax incentives to companies who want to do research and development, for example,” Basri said. “If we want to stay in natural resources, we need to come up with something that introduces technology — more advanced than just exporting raw materials,” he added.
Both candidates in the July presidential election made protectionist statements during their campaign. President-elect Joko Widodo told voters that “every country has barriers,” when asked about the likely impact of an economic community proposed by the Association of Southeast Asian Nations. He added: “(We can) make it a bit more difficult for foreign investors.”
Arianto Patunru, an economist at the Australian National University in Canberra, said the new president will likely be “more pragmatic than he appeared in his campaign,” during which he claimed that “our natural resources have been drained away by multinational companies and their Indonesian compradors.”
But Widodo’s policymaking will have to take into account the fact that more than 60% of parliament members supported rival presidential candidate Prabowo Subianto, who struck a more robustly protectionist tone. Some of these lawmakers, however, are expected to switch sides before Widodo takes office in October.
Widodo has said he wants to assist small farmers and landowners, who stand to benefit if foreign ownership is scaled back, restricting international competition for land. PricewaterhouseCoopers said the palm oil plantation industry “actively provides opportunity for small-scale farmers to participate in the palm oil planting, develops the rural economy and generates significant employment.”
Environment last?
Nonetheless Cargill, which is also the biggest privately held U.S. company, believes the measure will both reduce Indonesia’s attractiveness to foreign investors and undermine work done to make Indonesia’s oil palm sector more environmentally friendly.
The industry has long been a target for green campaigners, who accuse palm oil producers of causing deforestation and harming habitats of endangered species such as orangutans and tigers. Slash-and-burn clearing of forests and peat land on the island of Sumatra causes an annual haze that drifts across to nearby Malaysia and Singapore, undermining Indonesia’s relations with both neighbors.
The authors of a recent report by the University of Maryland calculated that Indonesia, which has the world’s third-biggest rainforests after Brazil and the Democratic Republic of Congo, lost an area almost as large as Ireland between 2000 and 2012, in part because of clearances for palm oil plantations.
The Roundtable on Sustainable Palm Oil, a group run by palm oil producers and green groups that certifies environmentally sustainable plantation practices, says that 35,000 sq. km of forest in Indonesia, Malaysia and Papua New Guinea were converted for oil palm plantations between 1990 and 2010.
“I assume that in framing this law, the lawmakers were thinking about how to support Indonesian business interests and were not concerned about forest preservation,” said Patrick Anderson, a consultant to the Forest People’s Alliance, which represents indigenous and tribal groups in tropical forest regions.
