Indonesian Palm Oil Companies Post Profit despite Low Prices
While many of Indonesia's coal producers have ceased operations as the production cost margin turned negative, the country's crude palm oil (CPO) producers are still making a profit despite palm oil prices also having weakened sharply in recent years. The Palm Oil Agribusiness Strategic Policy Institute (Paspi) said that production costs for palm oil producers stand in the range of USD $250 to USD $300 per ton, implying that with current CPO prices at around USD $550 per ton, CPO producers still make a reasonable profit.
Tungkot Sipayung, Director of Paspi, stated that even when crude palm oil (CPO) prices were as low as USD $300-$400 per ton in 2006, the privately-held large and mid-sized CPO producers still managed to make profit.
However, Sipayung said two groups of CPO producers have more difficulty to earn a profit in times of low CPO prices. These groups are the state-owned palm oil producers and the smallholder farmers. The state-owned CPO companies make less profit as they are engaged in various social missions. Meanwhile, the smallholder farmers experience most difficulties among all palm oil producers as fresh fruit bunches (FFB) are only worth IDR 400 (approx. USD $0.03) per kilogram while these farmers also have to face higher minimum wages. As such, Sipayung suggests the government should also cut tax on FFB or CPO sold by these farmers in an effort to support them. In the recent economic stimulus packages - unveiled by the Indonesian government - it provides several tax incentives to boost the Indonesian economy but not to palm oil farmers.
Regarding prices, Sipayung expects the CPO price to rise to about USD $700 per ton in 2016 on the back of curtailed CPO production in Indonesia and Malaysia (due to droughts) and Indonesia's biodiesel program. Both matters will make their presence felt in 2016. The El Nino-inflicted droughts (and the recent forest fires on parts of the key palm oil growing islands of Sumatra and Kalimantan) and the government's plan to introduce the B20 biodiesel program in 2016 are expected to boost CPO prices. Sipayung estimates that CPO production will decline by 20 percent in 2016 due to unconducive weather this year. Therefore, he sees the CPO price rising despite persistent sluggish CPO demand from China.
In its heyday - in early 2011 - the CPO price nearly touched USD $1,250 per ton. However, with the exception of a rebound at the start of 2012, the CPO price then started to weaken sharply, touching a low of USD $480 per ton in September 2015 before, finally, a rebound occurred (which is expected to continue into 2016 on expectations that El Nino-inflicted dry weather will curb CPO output in the world's two largest producers Indonesia and Malaysia, while higher CPO demand in Indonesia is projected to increase due to the government's biodiesel program).