Report Highlights:

Indonesia is experiencing an El Nino event characterized by atypical dryness throughout much of its palm oil production regions. Weather data indicates that although this El Nino is strong, the dryness in Indonesia is not as severe as the 1997/98 El Nino event. Field observations and industry sources confirm that production declines are stronger than typical dry season losses. Sources stress, however, that losses are not on par with yield declines experienced in 97/98. Indonesia's new levy and biodiesel subsidy are driving domestic palm oil consumption, pushing industrial consumption up from zero in the first half of the year to 2 MMT by the end of 2014/15. Indonesian soybean production has slightly increased as a result of the current El Nino event, as farmers substituted soy for rice in rainfed areas not receiving enough rain to support a third rice crop.

Oil, Palm

Production

Indonesia is experiencing an El Nino event characterized by atypical dryness throughout much of its palm oil production regions. Weather data indicates that although this El Nino is strong, the dryness in Indonesia is not as severe as the 1997/98 El Nino event. The Indonesian National Weather Agency (BMKG) reports the El Nino started in June, and expects that it will peak in November, carrying on through the first quarter of 2016. As a result, Palm oil production declines are expected to start in December, and will linger through the next year, depending on the severity and duration of the dryness.

Palm oil plantations require approximately 200 cm of rain per month to achieve optimal conditions. Rainfall below optimal levels, however, must be sustained for at least three months before production declines will occur. In the present scenario, National Oceanic and Atmospheric Administration (NOAA) data shows that precipitation during the July-October period reached between 5 and 50 percent of normal levels in Southern Sumatera, where approximately 24 percent of Indonesia oil palm plantations are located. Northern Sumatera, representing about 47 percent of Indonesia's palm oil production, has received more rainfall during the same period. Kalimantan, producer of the bulk of the remainder of Indonesia's palm oil, experienced dryness levels similar to Southern Sumatera. As a result, the most significant production issues were experienced in Kalimantan and Southern Sumatera.

Field observations indicate that although El Nino is driving down yields, declines are mitigated by regional weather variations, improved cultivar varieties since the 1997-98 drought, and young plantations reaching maturity. Planting data indicates that new plantings reached near-peak levels in 2013, implying that production continues to rise as plantations reach full maturity. Industry sources confirm that production declines are stronger than typical dry season losses, however, they stress that losses are not on par with yield declines experienced in 97/98. As a result, Post expects that yield declines will offset new production increases, leaving palm oil production flat at 33 MMT in MY 2015/2016. Post will continue to observe production declines over the coming months to determine if further downward revisions are necessary.

Many palm oil producers comment that in addition to El Nino, forest fire haze has also diminished palm oil production to a small extent. Despite these comments, there is no accurate measure to estimate haze-related losses and Post assumes that the majority of production losses are due to water stress.

Consumption

Indonesia's biodiesel program is driving domestic palm oil consumption. Biodiesel production fell to zero in the first half of 2015, following declining export demand and an uncompetitive subsidy scheme for domestic production. In July 2015, a new export levy was established, charging 50 dollars for every ton of palm oil or palm oil product exported. These funds are in turn used for palm oil industry development, mainly as a subsidy for biodiesel blending. Indonesia Regulation 12/2015 sets a target blending rate of 20 percent for the transportation sector. The mandate applies to both public and private sector fuel blenders, although as of November 2015, only the public sector fuel blenders are complying with the mandate. Regulation 12/2015 also targets 30 percent blending for electricity generation. Industry contacts report, however, that electricity generation blending is not yet taking place as the mandate is unfunded.

Indonesia's biofuel subsidy was rolled out in September, 2 months following the implementation of the palm oil levy. Approximately 158 thousand kiloliters (KL) of biodiesel were distributed in the first procurement period, with the CPO fund agency (BPDKPS) reporting a payment of IDR 27.9 billion (USD 2.1 million) for 6 biodiesel producers (November 2015). Based on anticipated palm oil exports, Post estimates that BPDKPS can collect approximately USD 1.2 billion next year. Assuming stable biodiesel/price spreads, subsidies could potentially reach 3.2 MMT of biodiesel. Subsidized biodiesel will likely remain concentrated in the Public Service Obligation (PSO) transportation sector.

The Ministry of Energy and Mineral Resources (MEMR) recently appointed biodiesel producers for the 2nd procurement period (November 2015 to April 2016). The appointed producers receive the right to bid as suppliers for direct-procurement from Pertamina and PT AKR. The allocation totals 1.8 million KL and 18.4 thousand KL, respectively.

Industry sources claim that additional blending facilities are expected to come online in 2016, raising production capacity. This includes at least two biodiesel production facilities, each with blending capacity reaching 300 thousand MT per year. The government also recently announced a plan to build 33 tanks with a storage capacity of 23 thousand KL. These tanks are intended to help improve biodiesel distribution in outlying areas off of Java.

Based on subsidized consumption in the transportation sector, Post maintains industrial consumption at 3400 MT in MY 15/16. Domestic food consumption is expected to expand at approximately the same rate as population growth. Total Indonesian consumption is thus expected to reach 9420 MT.

Trade

Palm oil continues to trade at a discount vis-à-vis other vegetable oils, with the palm oil-soy spread reaching approximately $94 in October 2015. Palm oil has maintained this competitiveness throughout the last several months, exceeding 2013/14 performance for every month except December. Post attributes strong export performance to palm oil's price advantage, forward buying in anticipation of price increases due to the El Nino, and a weak Rupiah. China, India and Pakistan are the leading markets for Indonesian palm oil. Shipments to China were strong, with January - September 2015 exports exceeding China's total CY 2014 imports.

Post highlights that exports were neither disrupted nor diverted in August/September, despite the 50 dollar premium on Indonesian palm oil resulting from the new levy. Industry sources indicate that the 50 dollar premium has been passed on to producers, thus ensuring Indonesia's competitiveness vis-à-vis Malaysia and other palm oil producers. As a result, Post maintains palm oil exports at 24 MMT in MY 2015/16. 2014/15 exports remain unchanged at 23.5 MMT.

Stocks

Indonesian palm oil stocks have grown in recent years, as production continues to expand and biofuel exports fell off. Looking to 2015/16, Post expects ending stocks to decline to 2800 MT, following the creation of the new biofuel subsidy and the domestic biodiesel's jump in consumption. Strong export demand and stagnant production are also helping reduce stocks.

Oil, Palm

2013/2014

2014/2015

2015/2016

Market Begin Year

Oct-13

Oct-14

May-15

Indonesia

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Area Planted

-

10,325

-

10,640

-

10,800

Area Harvested

8,115

8,115

8,540

8,540

8,965

8,965

Trees

-

1,548,750

-

1,596,000

-

1,643,250

Beginning Stocks

1,758

1,758

1,768

1,540

1,748

3,220

Production

30,500

30,500

33,000

33,000

35,000

33,000

MY Imports

27

27

-

0

-

-

MY Imp. from U.S.

-

-

-

0

-

-

MY Imp. from EU

-

-

-

0

-

-

Total Supply

32,285

32,285

34,768

34,540

36,748

36,220

MY Exports

21,719

21,719

23,000

23,500

24,000

24,000

MY Exp. to EU

3,500

3,500

3,500

3,500

3,500

3,500

Industrial Dom. Cons.

3,400

3,500

4,300

2,000

5,000

3,400

Food Use Dom. Cons.

5,168

5,270

5,400

5,500

5,600

5,700

Feed Waste Dom. Cons.

230

256

320

320

320

320

Total Dom. Cons.

8,798

9,026

10,020

7,820

10,920

9,420

Ending Stocks

1,768

1,540

1,748

3,220

1,828

2,800

Total Distribution

32,285

32,285

34,768

34,540

36,748

36,220

-

-

-

-

-

(1000 HA) ,(1000 TREES) ,(1000 MT)

Soybean

Production

Indonesian soybean production has slightly increased as a result of the current El Nino event. Soybean production is concentrated primarily in Central and East Java Provinces, and is grown as part of a rice/corn rotation. It is often planted as a short duration crop during the less productive third planting season (June – September), when rice or corn are not viable alternatives. Approximately 80 percent of Javanese farmland has access to irrigation, with Indonesian farmers tending to favor rice and corn cultivation given its higher profitability. The remaining portion of unirrigated land follows a similar cropping pattern as the irrigated land, favoring rice or corn, and planting pulse or horticultural crops when rainfall isn't sufficient.

During the 2014/15 third production period, excessive dryness resulted in land either being left fallow or being planted to soy. Local farmers reported that given the unusual dryness, soybean was better adapted to some areas due to its shorter duration and lower water requirements. As a result, the third cropping period experienced a decline in rainfed rice production, which was partially offset by increases in soybean production. 2014/15 area harvested is thus increased to 460,000 HA, and production is increased slightly to 630,000 MT. Post's 2015/16 production and area harvested estimates remain at 620,000 MT 450,000 HA, respectively, although this may increase if dryness in 2016 pushes rainfed farmers to substitute soybean for rice and corn again.

Consumption

Indonesian soybean consumption is predominantly used for food use, mainly as an ingredient in Indonesia's large tempeh and tofu industry. Tempeh producers report a strong preference for US beans, noting their uniform size and color. As a staple food product, Indonesia's market for imported soybeans is mature. As a result, consumption is expected to grow at pace with population growth. 2014/15 soybean consumption is thus stable at 2.75 MMT. Post estimates that 2015/16 consumption will reach 2.87 MMT.

Trade

Final trade data shows that 2014/15 soybean imports rose by approximately two percent over the previous marketing year. Import tariffs remain at zero. 2015/16 imports are thus expected to remain stable, reaching at least 2.2 MMT. In previous years, imports have increased due to forward buying based on advantageous pricing. Although local soybean production may increase if dry weather pushes into the 2016 planting season, potential increases are not considered sufficient to offset imports.

Indonesia Soybean Imports, Reported by Exporters

2012/13

2013/14

2014/15

October

217,561

236,793

59,687

November

61,710

111,349

253,089

December

140,093

207,418

247,938

January

153,441

175,105

165,530

February

101,029

214,902

256,607

March

257,118

308,981

277,139

April

183,723

271,339

156,803

May

110,532

159,915

142,277

June

179,340

86,702

171,108

July

35,468

161,256

90,970

August

139,507

43,710

117,917

September

160,907

88,354

170,954

Total

1,740,429

2,065,824

2,110,019

Stocks

Soybean stocks are expected to decline in 2015/16. Stock declines follow a period of stock building, attributable to low soybean prices and forward buying in previous years. 2014/15 stocks were revised slightly upwards, reflecting the slight increase in production.

Oilseed, Soybean

2013/2014

2014/2015

2015/2016

Market Begin Year

Oct-13

Oct-14

May-16

Indonesia

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Area Planted

450

550

450

500

430

550

Area Harvested

450

450

430

460

430

450

Beginning Stocks

15

15

230

225

120

175

Production

650

675

600

630

600

620

MY Imports

2241

2,240

2075

2,100

2300

2,200

MY Imp. from U.S.

2131

2,000

1900

2,000

2200

2,000

MY Imp. from EU

0

-

0

-

0

-

Total Supply

2906

2,930

2905

2,955

3020

2,995

MY Exports

1

1

0

-

0

-

MY Exp. to EU

0

-

0

-

0

-

Crush

0

-

0

-

0

-

Food Use Dom. Cons.

2645

2,645

2750

2,750

2875

2,870

Feed Waste Dom. Cons.

30

59

35

30

40

30

Total Dom. Cons.

2675

2,704

2785

2,780

2915

2,900

Ending Stocks

230

225

120

175

105

95

Total Distribution

2906

2,930

2905

2,955

3020

2,995

TS=TD

0

0

0

0

0

0

(1000 HA) ,(1000 MT)