Indonesia has been trying to regulate its domestic market of cooking oil, leading to shifts between shortage and price hikes. Trade Minister alleged a “cooking oil mafia” was responsible for speculation.
The government of Indonesia has been struggling to control the market of cooking oil as its prices rose more than 40% since the start of 2022 amid a surge in global prices.
On March 18, Indonesia Trade Minister Muhammad Lutfi visited stores in Jakarta where he could see plenty of branded and packaged cooking oil on the shelves. However, he was confused by this sudden availability. “I’m also confused about where this came from. All of a sudden, it all came out,” said the minister of Trade during a dialogue with women, according to Tribun News.
Two days earlier, the government actually removed its retail price cap policy, the Highest Retail Price mechanism, for branded and packaged cooking oil.
Controlling prices increased shortage of cooking oil
Since mid-January, the government imposed price caps on cooking oil in an attempt to curve domestic price hikes. Trying to mitigate the cooking oil price rise, Indonesian authorities actually changed its price cap policy multiple times.
They first only capped the price of packaged cooking oil at 14,000 rupiahs (US$1) per liter in supermarkets but not for smaller local retailers. As of February 1, the Highest Retail Price for bulk cooking oil was set at 11,500 rupiahs per liter, simple packaged cooking oil at Rp13,500/liter, and premium packaged cooking oil at Rp14,000/liter for all stores.
Bulk cooking oil is sold in traditional stores and markets in bags with no branding or label. It is the most affordable and the first choice for the population. Packaged cooking oil is sold in bottles or more solid containers and is a more premium product.
Moreover, Indonesia restricted exports in late January to improve domestic supply. It then on March 9 increased its national requirement, the Domestic Market Obligation, from 20% to 30% of the production of crude oil.
But as the government tried to increase domestic supply, shelves became emptier. Moreover, cooking oil was sold at higher prices than the caps, and stores were short of vegetable oil despite rationing its sale.
By trying to limit inflation, the government seemed to have actually made the situation worse. It acknowledged its mechanism increased scarcity.
Multiple shifts in Indonesia’s policy
So along with lifting price caps on premium cooking oil on March 16, the government also removed export volume restrictions. The government chose to double its export levy instead.
Last Monday, the Indonesian Vegetable Oil Industry Association (GIMNI) asked for the 30% DMO to be canceled as the industry feared that export volume restrictions would hurt relations with business partners and shift demand to other countries like Malaysia. Indonesia is the world’s biggest producer and exporter of palm oil.
But as supply in Indonesian stores suddenly increased last week, prices however jumped.
Over the weekend, cooking oil retail prices grew between 7% and 9% nationwide according to the National Strategic Food Price Information. Bulk cooking oil was on average sold at 18,950 rupiahs on March 21.
The Minister of Industry on March 21 issued the new Highest Retail Price for bulk vegetable oil. It is set at Rp14,000 per liter, which used to be the highest retail price of the most premium packaged cooking oil.
It also ordered all cooking oil producers to supply bulk cooking oil on domestic markets for households and small companies in order to ensure its availability and price stability. “Cooking oil is a strategic industrial commodity that concerns the livelihoods of many people and its availability has an important role for broad social and economic aspects,” the ministry said in a statement.
There are 81 industrial cooking companies bound to supply 14,000 tonnes of bulk cooking oil per day. To receive subsidies reducing the impact of the price cap, companies cannot export bulk cooking oil, repackage it or sell it to large or medium-sized companies.
A “cooking oil mafia” according to the Trade Minister
In light of a chaotic supply chain of cooking oil, the minister of Trade alleged on Thursday that a “cooking oil mafia” was taking advantage of the issue. When the domestic cooking oil supply increased, shelves yet remained empty. Lutfi alleges fraudsters would use subsidized bulk cooking oil and repackage it into premium products or would smuggle it abroad. The minister apologized for not being able to control this mafia.
Businesses like distributors would also stockpile cooking oil, waiting for the end of the price caps. According to the Indonesia Competition Commission, only four organizations control almost half of the palm plantations and cooking oil production, making them able to dictate the market.
The minister gave names of suspects and the Indonesia Competition Commission so far investigated 20 people.
But for Rachmat Gobel, former Minister of Trade affiliated to the ruling coalition and deputy speaker of the Indonesian House of Representatives, there is no cooking oil mafia. Only a bad policy was implemented. “We made a mistake in setting up policies. That’s all. They are entrepreneurs who want to make a profit. They saw a regulatory loophole but we shouldn’t immediately label them as mafia,” he argued on Monday.
Cooking oil has been in the spotlight with the war in Ukraine as it is the largest exporter of sunflower oil, and countries are worried about food security.
For the government of Indonesia, ensuring and monitoring price stability and food stocks have become even more pressing as Ramadan starts in April.