The government and industry observers are urging investors to expand beyond crude palm oil and into other agricultural commodities amid a combined investment pledge of Rp 313 trillion (US$22.20 billion) for the plantations sector.
Agriculture Ministry plantations director general Kasdi Subagyono called on businesses to invest in the downstream segment of the palm oil industry rather than investing in crude palm oil as nearly three-fourths of the 514 investment pledge with a potential value of Rp 313 trillion go to the palm oil.
“The requirements are simple. As long as the capital is present alongside a custodian bank, we can be open to investment,” he said on Sept. 19.
Palm oil has generated significant foreign exchange revenue for Indonesia, contributing 1.5 percent to 2.5 percent to gross domestic product (GDP).
Smallholder farms account for cultivating oil palm on more than 3 million hectares of agricultural land in the country.
Indonesia produces an average 41 million tons of crude palm oil (CPO) each year, of which 34 million tons are exported around the globe, according to the Agriculture Ministry.
However, Indonesian palm oil has been facing pressure from the European Commission since March, when it reached a decision to phase out the use of palm oil by 2030 over deforestation concerns raised by the high-risk indirect land use change (ILUC) vegetable oil. The decision has sparked a trade spat between the European Union (EU), one of the world’s top importers of palm oil, and leading palm oil producers Indonesia and Malaysia.
Indonesian Employers Association (Apindo) executive director Danang Girindrawardana said that although it was normal to see enormous investor interest in the highly productive palm oil industry, investing in the downstream segment might not address efforts to diversify investments, as downstream businesses required complex technologies to be successful.
Danang, formerly executive director of the Indonesian Oil Palm Association (Gapki), suggested as an alternative that the government shift its attention to other commodities deemed exploitable for their high domestic and export demands, such as rubber and sugarcane.
“If the upstream palm oil [segment] no longer needs further expansion […] then the government’s next challenge is to allocate lands for other commodities to compel investors to look past other plantation subsectors,” Danang explained.
Ease of access to logistics and infrastructure was also key to developing such tactics, Danang added.
Indonesia currently imports sugar from countries like Australia, since the high basic expenses that sugarcane farmers incur hampered Indonesia’s sugar production, the Sugarcane Farmers Association has said.
Rubber plantations have also been on a similarly rocky road after prices plunged when the government slashed its exports alongside major rubber producers Malaysia and Thailand in an attempt to stabilize global rubber prices. Meanwhile, Indonesia’s rubber farmers are bewailing the low prices and a plant disease epidemic.
Agricultural economist Hermanto Siregar of the Bogor Agricultural University (IPB) shared Danang’s view of diversifying investment to other agricultural sectors, saying that intensive palm oil development could lead to global oversupply in the long term as other countries jumped on the CPO bandwagon.
Aside from rubber, Hermanto also saw potential in Indonesia’s beef products, as the archipelago was suited to developing cattle farms.
The country has long been dependent on beef imported from producers like Australia and New Zealand to meet domestic demand. The Agriculture Ministry’s data shows that Indonesia’s cattle industry produced enough beef to meet just 61 percent of domestic consumption in 2018.
“But we have to remember to keep improving the investment [climate] to compete with our rivals by speeding up licensing and providing legal certainty,” cautioned Hermanto.
Despite the obstacles, agricultural investments in Indonesia have grown significantly over the last decade. The Investment Coordinating Board (BKPM) recorded that investments in the agriculture industry and related sectors increased more than 150 percent to Rp 240.8 trillion in 2014-2018 against agricultural investments of Rp 96.1 trillion it recorded in 2009-2013.
By: Made Anthony Iswara