Indonesia.Oilseeds and Products Update July 25, 2016

Highlights

Post reduces MY 2015/16 production estimates to 32 million metric tons (MMT), following the 2015 El-Nino weather event that resulted in drought in key production areas. A La Nina event is expected to bring higher than normal levels of rainfall in MY 2016/17, helping palm oil production recover to 33.5 MMT. Indonesia's biodiesel program is driving industrial domestic consumption and is expected to grow to 3.5 MMT, bringing total consumption to 9.62 MMT in MY 2016/17. Soybean production is expected to remain unchanged at 600 thousand MT in MY 2016/17.

Production

An El-Nino weather event resulted in drought throughout Indonesia in 2015, including key palm oil production areas in southern Sumatera and southern Kalimantan. Production declines are peaking, with plantation managers reporting yield declines as low as 5 percent and as high as 40 percent. Peak yield declines correspond with a lag of approximately six to nine months following dry weather. As a result, fresh fruit bunch production has been offset by male flower production by up to 50 percent in some areas. Additionally, FFB are yielding crude palm oil at lower rates than normal, mostly due to smaller FFBs with fewer fruits. Considering the severity of production declines in some areas, Post reduces MY 2015/16 production estimates to 32 million metric tons.

Despite low production, the same production areas in southern Kalimantan and Sumatera are currently experiencing new rainfall, raising expectations for normal conditions in 2016/17. Indonesia's national weather agency (BKMG) supports this, forecasting a La Nina weather event in late 2016. A La Nina event will bring higher than normal levels of rainfall. As a result, Post expects that production levels will start their recovery in 2016/17. Given the severity of stress to some of the plantations, however, full recovery is expected to take up to 24 months under normal rain conditions. Post therefore estimates palm oil production will reach 33.5 MMT in MY 2016/17.

A draft regulation is being prepared that will implement a new moratorium on palm oil plantation expansion. A peatlands forest moratorium was already established in 2011. MEF stated that 950 thousand hectares of forestland conversion permits have already been suspended for palm plantation since the President's moratorium order in April 2016. 950 thousand ha is the equivalent of 11 percent of Indonesia's total existing planted areas.

Consumption

Indonesian palm oil consumption has been transformed through biodiesel blending and a subsidy program implemented in mid-2015. Biodiesel consumption had fallen close to zero by early 2015, but surged ahead following the creation of a levy charged on palm oil exports. Funds gathered through the levy are used to make up the difference between fossil fuels and palm oil-based biodiesel. As a result of the levy program, more than 700 million liters of biodiesel were subsidized in the first quarter of 2016.

The Government of Indonesia (GOI) created the Plantation Fund Agency (BPDPKS) to manage the income generated by the levy as well as distribute the subsidy. The value of the levy in 2016 will reach approximately IDR 9.5 trillion, or 698 million US dollars. The initial estimates expected fossil fuel prices to stabilize at higher levels than what has occurred. Indonesia may be able to subsidize between 2.5 – 2.8 billion liters of biodiesel in 2016.

According to the GOI's Regulation 24/2016, BPDPKS has a mandate to subsidize biodiesel for electricity generation. A significant increase in biodiesel consumption for electricity generation is unlikely, as the company is mainly vested in coal burning power plants. The B-30 blend is poorly adapted to the few existing diesel powered generators. As a result, biodiesel consumption will remain primarily in the on-road sector.

Considering the above, Post expects that Indonesian industrial palm oil consumption will reach 3.2 MMT in MY 2015/16 and grow to 3.5 MMT in MY 2016/17. Increasing consumption will be driven by biodiesel transportation sector. Domestic food consumption is expected to reach 5.8 MMT in MY 2016/17, an increase of 100 TMT over MY 2015/16. Increases in food consumption are driven by population growth.

Trade

Palm oil prices reached 680 USD/MT in April 2016, their highest level since October 2014. High palm oil prices correspond with low CPO yields related to the El Nino weather event and the growth of biodiesel blending. Despite CPO price increases, palm oil continued to trade at a discount to soybean oil, with the price differential narrowing to 62 USD in May 2016.

Post expects that Indonesian palm oil exports will decline slightly in 2015/16. The expected decline is the result of palm oil prices, which are further exacerbated by Indonesia's 50 dollar per ton levy on CPO. Additionally, the success of Indonesia's biodiesel blending program is pushing up domestic consumption, offsetting exports. Post notes that export declines to major export destinations have been led by China, the EU, and the African continent. Palm oil exports to China have declined by 12 percent over the previous year, primarily because of softening demand in China due to increased soybean crushing for China's growing livestock sector.Based on these reasons, Post expects Indonesian palm oil exports will decline from 25.9 MMT in MY 2014/15 to 23 MMT in MY 2015/16. 2016/17 exports are currently estimated at 24 MMT.

Stocks

Increasing domestic demand is driving down stocks. Ending stocks are revised down to 542 thousand MT in MY 2015/16 and 422 thousand MT in MY 2016/17.

Production, Supply and Demand Data Statistics

Oilseeds, Soybean

Production

The prices are too low to induce additional soybean production. Dry weather throughout 2015/16 resulting from an El Nino phenomenon helped further drive down soybean harvested area in favor of shorter duration crops such as mung beans. This is confirmed by seed dealers, who noted a slight decline in soybean sales. As a result, Post estimates that harvested area dropped slightly from 450 to 440 thousand hectares. The resulting production decline is minimal, however, and Post's estimate is therefore left unchanged. The MY 2016/17 Indonesia soybean production estimate also remains unchanged at 600 thousand MT.

Consumption

Soybeans and soybean products such as tempeh and tofu are staple proteins in the Indonesian diet. Indonesian soybean consumption is thus primarily concentrated in the human consumption category. As low cost staple proteins, their consumption is relatively stable, with growth keeping pace with population increases. Based on this analysis, Post estimates Indonesian soybean human consumption will reach 2.77 MMT in MY 2015/16 and 2.79 MMT in 2016/17. Feed soybean consumption is expected to remain stable at 30 thousand MT.

Trade

Indonesia imports approximately 75 percent of its soybean requirement, with U.S. soybeans making up the majority of their imports. Post notes that Indonesian soybean self-sufficiency objectives remain largely unrealized, with local officials and farmers noting that a significant change in local soybean production is highly unlikely. Post therefore expects Indonesia to continue importing soybeans at regular and consistent levels. MY 2015/16 imports are thus estimated to grow to 2.2 MMT and MY 2016/17 will increase to 2.25 MMT.

Stocks

Indonesian soybean production remains unchanged, while imports and consumption are growing in sync. As a result, stocks remain low. 2014/15 stocks have been revised slightly in order to account for final trade data. 2015/16 and 2016/17 stocks are resulting adjusted to accommodate the slight change in rollover stocks. MY 2015/16 stocks are now set at 34 thousand MT and MY 2016/17 stocks are estimated at 63 thousand MT.

Production, Supply and Demand Data Statistics