The Largest Producer of Palm Oil – Palm oil is one of the most consumed and produced oils in the world. This cheap, easy-to-produce, and very stable oil is used for a wide variety of foods, cosmetics, hygiene products, and can also be used as a source of biofuel or biodiesel. Most palm oil is produced in Asia, Africa, and South America because oil palm trees require warm temperatures, sunshine, and high rainfall to maximize production.
Indonesia Is The Largest Producer Of Palm Oil In the World
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A negative side effect of palm oil production – apart from its impact on human health due to its high saturated fat content – is the fact that the palm oil business is a key driver of deforestation in countries such as Indonesia and Malaysia. Indonesia is the world’s largest producer and exporter of palm oil. However, Indonesia is also the largest emitter of greenhouse gases after the People’s Republic of China (PRC) and the United States (US).
Indonesia’s Largest Palm Oil Producer and Exporter World
palm oil production is dominated by Indonesia and Malaysia. These two countries in total produce about 85-90% of the world’s total palm oil production. Indonesia is the largest producer and exporter of palm oil.
In the long term, the world demand for palm oil shows an increasing trend in line with the growing world population and therefore increasing consumption of products made from palm oil such as food products and cosmetics. Meanwhile, governments in various countries are supporting the use of biofuels.
Palm Oil Production Expectations 2016:
| Countries | Production (metric tonnes) |
| Indonesia | 36,000,000 |
| Malaysia | 21,000,000 |
| Thailand | 2,200,000 |
| Colombia | 1,320,000 |
| Nigeria | 970,000 |
| World | 58,800,000 |
Palm Oil Production and Export in Indonesia
Only a few industries in Indonesia have shown the rapid development of the palm oil industry over the past 20 years. This growth is evident in the amount of production and exports from Indonesia and also in the growth in the area of oil palm plantations.
Driven by increasing global demand and rising profits, oil palm cultivation has been significantly increased by both smallholders and large entrepreneurs in Indonesia (with negative impacts on the environment and a decrease in the production of other agricultural products as many farmers switch to oil palm cultivation).
The majority of Indonesia’s palm oil production is exported. The most important export destinations are China, India, Pakistan, Malaysia, and the Netherlands. Although the figure is very insignificant, Indonesia also imports palm oil, mainly from India.
Indeed, the majority of palm oil produced in Indonesia is exported (see table below). However, as Indonesia’s population continues to grow (accompanied by a rapidly growing middle class) and government support for the biodiesel program, domestic demand for palm oil in Indonesia also continues to grow. Increasing domestic demand for palm oil could actually mean that crude palm oil shipments from Indonesia will stagnate in the coming years if the Indonesian government remains committed to a moratorium on peatland conversion (read more below).
Indonesian Palm Oil Production and Export
| 2014 | 2015 | 2016 | |
| Production (million tonnes) | 31.5 | 32.5 | 32.0 |
| Export (million tonnes) | 21.7 | 26.4 | 27.0 |
| Export (US dollar) | 21.1 | 18.6 | 18.6 |
| Area (million ha) | 10.7 | 11.4 | 11.8 |
The table above shows that palm oil production has increased dramatically over the past decade. The Indonesian Palm Oil Association (Gapki) stated that Indonesia could produce at least 40 million tonnes of palm oil per year starting from 2020.
The oil palm plantation and processing industries are key industries for the Indonesian economy:
Palm oil exports are an important foreign exchange earner and the industry provides employment opportunities for millions of Indonesians. In terms of agriculture, palm oil is the most important industry in Indonesia, contributing between 1.5 – 2.5 percent of total gross domestic product (GDP).
Nearly 70% of oil palm plantations are located in Sumatra, where the industry dates back to the Dutch colonial era. Most of the remainder – about 30% – is on the island of Borneo.
- Sumatra
- Kalimantan
In terms of geography, Riau is the largest palm oil producer in Indonesia, followed by North Sumatra, Central Kalimantan, South Sumatra, and West Kalimantan.
According to data from the Central Statistics Agency (BPS), the total area of oil palm plantations in Indonesia currently reaches around 11.9 million hectares; nearly three times the area in 2000 when about 4 million hectares of land in Indonesia were used for oil palm plantations. This number is expected to increase to 13 million hectares by 2020.
State-owned enterprises (BUMN) play a very modest role in the Indonesian palm oil sector as they have relatively few plantations, while large private companies (e.g., Wilmar Group and Sinar Mas Group) is dominant because it produces slightly more than half of the total palm oil production in Indonesia.
Small-scale farmers produce about 40 percent of Indonesia’s total production. However, most of these smallholders are very vulnerable in the event of a decline in world palm oil prices because they cannot enjoy the cash reserves (or bank loans) enjoyed by large companies.
Who Owns Palm Oil Plantations in Indonesia?
Major Indonesian companies (eg Unilever Indonesia) have made or are currently investing to increase palm oil refining capacity. This is in line with the Indonesian Government’s ambition to get more income from domestic natural resources.
Indonesia has been focused on (and dependent on) exports of crude palm oil (and other raw materials) but over the last few years, it has wanted to encourage the processing of natural resource products so that they have higher selling prices (and which serve as a buffer when prices slide palm oil Refining capacity in Indonesia jumped to 45 million tonnes per year in early 2015, up from 30.7 million tonnes in 2013, and more than double the 2012 capacity of 21.3 million tonnes.
Indonesian Palm Oil Export Tax Policy
To increase development in the downstream palm oil sector, export taxes on refined palm oil products have been cut in recent years. Meanwhile, the export tax for crude palm oil (CPO) is between 0% -22.5% depending on the international palm oil price.
Indonesia has an ‘automatic mechanism’ so that when the Government’s benchmark CPO price (based on local and international CPO prices) falls below the US $ 750 (US) per metric ton, the export tax is cut to 0%. This happened between October 2014 and May 2016 when this benchmark price fell below the US $ 750 per metric ton.
The problem is that exemption from export taxes means that the Government loses a large part of the (much needed) export tax revenue from the palm oil industry. So the Government decided to introduce palm oil export levies in mid-2015.
A levy of US $ 50 per metric ton is applied for the export of crude palm oil and a levy of US $ 30 per metric ton is set for the export of refined palm oil products. The revenues from these new levies are used (in part) to fund the Government’s biodiesel subsidy program.
