The Role of Markets, Technology, and Policy in Generating Palm-Oil Demand in Indonesia

Abstract

Indonesia produces more palm oil and consumes more palm oil per capita than any country in the world. This article examines the processes through which Indonesia has promoted palm-oil consumption and some of the consequences of that promotion. Partial equilibrium modelling shows that Indonesia's remarkable increase in palm-oil consumption since 1985 is not largely attributable to population and income growth. Instead, much of this consumption growth has resulted from substitution away from coconut oil, facilitated by government policies on technology, pricing, distribution, and trade. The switch from coconut oil to palm oil in Indonesia was associated with increased land conversions to agriculture and diminished smallholder competitiveness. Despite lower rates of cooking-oil substitution in the future, simulations suggest that Indonesia's total palm-oil consumption in 2035 will be at least double that of 2010.

Indonesia adalah produsen minyak kelapa sawit terbesar di dunia. Ia juga mengkonsumsi lebih banyak minyak kelapa sawit per kapita dibandingkan negara manapun di dunia. Tulisan ini menelaah proses yang dilalui Indonesia dalam mempromosikan konsumsi minyak kelapa sawitnya serta konsekuensi-konsekuensi yang timbul akibat promosi tersebut. Model ekuilibrium parsial menunjukkan bahwa kenaikan tajam konsumsi minyak kelapa sawit Indonesia sejak 1985 tidaklah dapat serta merta dikaitkan dengan pertumbuhan populasi dan pendapatan. Sebaliknya, sebagian besar pertumbuhan konsumsi ini merupakan akibat pengalihan konsumsi dari minyak kelapa ke minyak kelapa sawit, yang difasilitasi oleh berbagai kebijakan pemerintah dalam teknologi, pemberian harga, distribusi, dan perdagangan. Pengalihan konsumsi ini juga terkait dengan naiknya konversi lahan pertanian dan menurunnya daya saing petani kecil. Terlepas dari menurunnya tingkat substitusi minyak masak di masa depan, simulasi menunjukkan bahwa konsumsi total minyak kelapa sawit Indonesia pada 2035 paling tidak akan sebanyak dua kali lipat dari tingkatnya pada 2010.

Keywords:

• consumption
• markets
• palm oil

JEL classification:

• L22
• N55
• Q18

The author gratefully acknowledges Walter P. Falcon and Roz Naylor for invaluable discussions, Zahnur Rofi'ah for research assistance, the Center for International Forestry Research and Stanford University for administrative and financial support, and two anonymous reviewers for their feedback on the manuscript.

Notes

¹ In contrast, the income elasticity of demand for Indonesia's main staple, rice, is approximately 0.1 and may soon be negative (Timmer, Block, and Dawe 2010).

² The difference in the median income group was 0.03 kilograms per capita per week; with only nine income classes, it is not known whether the data are normally distributed.

³ The urban–rural difference in cooking-oil consumption is likely to be larger than the data suggest, since, as discussed, Susenas does not account for palm oil in prepared foods consumed outside the home.

⁴ This analysis assumes that migrants consumed the average amount of palm oil in 2010.

⁵ Adjusted using the World Bank's Indonesian GDP deflator.

⁶ In 2005 dollars.

⁷ Poorer and urban consumers spend more of their incomes on cooking oil, so a price decline would make them relatively wealthier, amplifying the effect of the price change.

⁸ Capacity figures for 1997 and 2006 represent actual CPO use and are therefore minimum estimates of installed capacity.