ALLEVIATING THE ROOT OF THE PROBLEM OF FOOD AND ENERGY SHORTAGE AND UNCONTROLLABLE PRICES: BLAME IT ON APRODUCTION OR DISTRIBUTION?

As one of the few countries that is Rp18,500, whilst regular cooking oil started at just geographically fortunate to be crossed by the above Rp17,000. At the end of March, the price equator, Indonesia is rich in natural resources increased by almost 50% for the premium cooking oil such as, gold, copper, oil and gas, rainforests, and various marine species. Hence, it is logical to assume that its vast natural resources would have ensured Indonesia’s food and energy security. However, Q1 of 2022 has proved this otherwise.

As per April 2022, the Ministry of Trade noted that the price of bulk cooking oil as of April 2022 was at Rp18,759 per litre, an increase of 50.3% from the same period last year at Rp12,475. In February to March 2022, premium cooking oil started at around reaching Rp26,000 whilst regular cooking oil prices increasing to almost Rp24,000 per liter. Even though the bulk cooking oil price does not change as much as the other two categories, it still went up from Rp16,000 to almost Rp18,000.1 This scarcity of cooking oil persists even though Indonesia is the most significant crude palm oil (CPO) producer globally.

In addition to the ongoing pandemic, the existing conflicts in Europe have not helped. Other commodities prices that have rocketed, including wheat, rice, crude oil to fertiliser, continued to soar in prices with concerns about supply chain constraints due to the war. This condition is expected to spur world inflation in the midst of a food emergency. This raises the question: Is the problem rooted in the production or distribution chain? How much could external factors affect prices? What should we do, and what should we have done?

Why does price fluctuation happen?

Price fluctuation of commodities typically happens for commodities that are highly consumed.3 From the economic perspective, price volatility relies upon supply and demand rules: high demand and low supply will increase the price of the goods. Unfortunately, this situation is not as simple as it sounds.

For cooking oil, several factors may have triggered its price fluctuation. First, the CPO’s international prices was up about 77% compared to January 2021.4 Second, declining palm oil harvests in the second half of 2021 dampened supply. It has made the supply of CPO become limited and distribution chain of the cooking oil industry become disrupted.

Third, there was an increase in the demand for CPO for the biodiesel industry as the result of the B30 policy implementation. Fourth, COVID-19 pandemic disrupts logistical chains as the number of containers and ships decreased.5 The pandemic also contributed to the decline in world palm oil supply.6 Further, the Russia and Ukraine war has raised fear of a global shortage of vegetable oil. Considering Ukraine is one of the countries that produce sunflower-based vegetable oil,7 traders started reviewing the alternatives – including palm- oil-base cooking oil.8 Finally, misappropriation of bulk cooking oil to the export market by parties who are supposed to distribute it to the public. This illicit action is because of the lower price in the domestic market obligation (DMO) and price ceilings, in comparison to the export price.

Government’s Efforts in Controlling the Wild Price Fluctuation of Cooking Oil

One of the first efforts to alleviate this problem is by instituting the highest retail price of cooking oil.10 It was later retracted because the price ceiling itself precipitated the shortage of cooking oil. Upon reevaluating the root of the problem, the Government realised that the problem was caused by the distribution chain instead of the production.11 As follow-up, the government set out four trade measures, (i) setting a quota for CPO export;12 and (ii) accelerating distribution of cooking oil by subsidising and paying for the price gaps by the Palm Oil Plantation Fund Management Agency (BPDPKS) for the people, (iii) oversight of the distribution of the cooking oil in the traditional market by the Indonesian Bureau of Logistics (BULOG) especially cooking oil from export- prohibited areas, whose producers do not have a distribution network; and (iv) take legal measures for cooking oil hoarders.13 In addition, cutting the distribution chain by directly distributing it to the retailer is now allowed.14 This way, the distribution is expected to be faster and more efficient so shortage of supply could be mitigated.

There are some valid concerns highlighting that there is no guarantee that banning export would suppress the price climb. The price of fresh fruit bunches (FFB) is based on the world CPO price, not on the volume of CPO exports. The lack of efficiency in distributing the product might instead worsen the situation because it might lead to the overfilled CPO storage tank, which cannot accommodate the new CPO – doing more harm than good in alleviating the problem. As distribution chain is the primary key to attenuating the cooking oil shortage, the government must ensure it can be performed effectively and efficiently. Another concern is the subsidised cooking oil program would not reach the right and appropriate targets as aimed or, even worse, be abused for profiteering by irresponsible members of the public. Some regulations have been promulgated to tackle this issue.15 However, the rules still have not yet been able to address certain aspects of the problem. For instance, the most current regulation specifically enacted for this purpose is the Regulation of the Minister of Industry Number 8 of 2022 concerning the Provision of Bulk Cooking Oil for the Needs of the Community, Micro Enterprises, and Small Businesses in the Financing Framework by the Palm Oil Plantation Fund Management Agency as amended in Regulation of the Minister of Industry Number 10 of 2022 (Regulation of the Minister of Industry 8/2022 jo 10/2022). Although the regulation mentioned the acceleration process of distribution for bulk cooking oil, some actors still do not obey the policy, resulting in the distribution breakdown of cooking oil.16 Furthermore, even though the Russia and Ukraine war significantly contributes to the rising price of cooking oil, the production issue of palm oil that might result in an increased price of cooking oil had actually been predicted since Q3 of 2021. Given the circumstances, even though the news of palm oil price surging has lingered since September 2021, the government did not take any measure to foresee and prevent the possibility of cooking oil scarcity in Indonesia. Hence, for the issues mentioned, the authors believe that several measures can be undertaken by the government, which are (i) to be firmer and more vigorous in enforcing and supervising the distribution chain of food commodities;17 (ii) to be trained to foresee and predict the unexpected and worst scenario (i.e. war; pandemic) and take prevention action; and (iii) to maintain a good balance between production, domestic market needs, and export and import of goods in order to stabilise the price and goods availability. EFF/SPU