To Ban or Not To Ban? How Indonesia Can Overcome the Global Food Crisis
Jakarta’s latest decision to briefly ban the export of crude palm oil has not helped Indonesians reeling from rising food prices. Rather than bending with the political wind, Indonesia’s leaders should steer its course by reconsidering fundamentals to improve its competitiveness in the global food economy.
Indonesia’s knee-jerk export ban on crude palm oil (CPO) and its derivatives epitomises the changing political winds in the national and global food trade amidst an imminent global food crisis. Although Jakarta lifted the palm oil ban on 23 May 2022, this might not be the last time Indonesia bans exports of food commodities.
Food prices are rising globally. Just before Indonesia’s ban, global food inflation was raging; the Food and Agriculture Organisation (FAO) Food Price Index reached an all-time high in March 2022. This inflation began in 2021 when global economic recovery from the pandemic picked up, but global food production and distribution remained constrained by labour shortages, supply chain disruptions and extreme weather.
China’s hoarding of grains since 2021 has contentiously been blamed for contributing to rising global food prices. By mid-2022, China, which has less than 20 per cent of the world’s population, is expected to hold more than half of the world’s maize, rice and wheat stores. China’s food stockpiles are at a historical high and, dangerously, this may encourage other countries to do the same.
Faced with uncertainty, countries are becoming more risk-averse. Exporting countries with food stocks are holding on to them and more countries, from the Balkans to North Africa, from Iran to India and Malaysia, have been banning food exports and hoarding food stocks. Export bans, currently imposed by at least 26 countries, account for about 15 per cent of calories traded worldwide. India’s wheat export ban has propelled global wheat prices even higher; they were already at record highs due to the Russia–Ukraine war, which has strangled one-third of wheat export channels to the world.
Indonesia is the world’s largest exporter of CPO and its derivatives. Its export ban would have had global repercussions if it were prolonged. In 2020, Indonesia’s CPO exports reached US$4.74 billion, or 52 per cent of global exports. Its export market share of palm oil derivatives is even higher than that for CPO, at 57 per cent, while palm oil derivatives made up 93 per cent of Indonesia’s total palm product exports in 2021 (see Figure 1).
Figure 1: Indonesia’s Exports of CPO and Its Derivatives in 2021
We calculate that Indonesia’s export ban on CPO could have increased the global CPO price by about 5.72 per cent with some lag of about nine months, due partly to countries holding onto a few months’ worth of stocks. A prolonged Indonesia export ban would have created immense pressure on palm oil prices globally. Even if the export ban might have reduced prices in Indonesia, it would have adversely affected global consumers, including in China and India, the two most populous nation-states and the largest importers of Indonesian and Malaysian palm oil (Table 1).
Table 1: Global Palm Oil Exports from Indonesia and Malaysia (2021)
Indonesia’s palm oil export ban underscores President Joko Widodo’s prioritisation of domestic politics over international affairs, as such a ban could potentially trigger retaliations from trading partners. Ironically, actions like this could backfire and eventually hurt Indonesia’s domestic economy and palm oil smallholder farmers. Indonesia’s rupiah could have depreciated against a backdrop of lower export revenues, holding other things constant, as palm oil exports accounted for about 22 per cent of Indonesia’s total exports in 2020. Such a currency depreciation could have stymied the Indonesian government’s effort to reduce inflation as the cost of imports will rise. With the US Federal Reserve increasing interest rates, downward pressures on the rupiah could increase further as capital outflows rise.
Widodo’s government has exhibited opaque and fallible economic policymaking in recent months, perhaps because there is insufficient opposition calling for accountability. Arguably, key stakeholders were not sufficiently consulted about the government’s flip-flop policies in managing increasing cooking oil prices. This sector has suffered whiplash from Jakarta’s impetuous decisions to increase the domestic market and price obligations, and to impose the brief export ban.
So, what can countries like Indonesia do to manage increasing cooking oil prices? The best option is to let domestic prices follow the global trend and reflect the true economic fundamentals, while subsidising poor households with cash transfers.
None of these policies has worked well. Prices for cooking oil have not fallen, because the problem seemingly lies in distribution channels rather than supply shortages. If anything, the policies have made distributors more likely to hoard and producers more reluctant to produce. Moreover, the fact that the decisions to impose and lift the export ban were announced following student (April 21, ahead of Ramadhan) and smallholder (May 17) protests respectively suggests that these were populist moves made by the president to appease the public, rather than sound policy based on actual market data and cost–benefit assessments.
The alleged supply shortage of palm oil for cooking oil should also be seen in the context of the government’s ambitious CPO-based biodiesel policy, which could create tensions between Indonesia’s energy and food security needs. The CPO-based biodiesel policy, which stipulates that fossil fuels must be blended with palm oil forming 30 per cent of the mix, is aimed at securing Indonesia’s energy sources, reducing carbon emissions and reducing the trade deficit. However, a study estimates that this plan, if carried out through 2030, could actually squeeze CPO export revenues. This squeeze would be even greater than the import savings from cutting dependence on diesel. Further, the additional palm oil required would demand an expansion of 48 to 76 per cent of current palm oil plantation land to meet total demand.
So, what can countries like Indonesia do to manage increasing cooking oil prices? The best option is to let domestic prices follow the global trend and reflect true economic fundamentals, while subsidising poor households with cash transfers. Indonesia could continue to implement a temporary export tax on refined, bleached and deodorised (RBD) palm olein, a direct input for cooking oil, but not on CPO or other derivatives. In contrast to an export ban, an export tax generates revenue, some of which can finance cash transfers to cushion poor households.
Indonesia, like many other countries, is likely to step up its food sovereignty efforts given global uncertainties. Instead of expanding agricultural land, Indonesia could focus instead on increasing productivity and improving the post-harvest phase of its supply chain, where it currently lags behind comparable countries. This would increase production volume and revenues and create value addition for farmers while benefiting Indonesian consumers. In the long run, this would make Indonesian produce more competitive globally when prices eventually fall.
 We used log-on-log regressions to measure the price elasticity of exports and regressed Malaysia’s CPO prices on lagged CPO exports from Malaysia and Indonesia. Together, Malaysia and Indonesia account for about 90 per cent of the global CPO export market. We also used first difference in log regressions for robustness checks.
Maria Monica Wihardja is an Economist and was a Visiting Fellow at ISEAS - Yusof Ishak Institute.
Arianto Patunru is a fellow at the Arndt-Corden Department of Economics, Australian National University, policy engagement coordinator at the ANU Indonesia Project, and advisor at the Center for Indonesian Policy Studies.