New Indonesia palm oil levy seen hurting demand, smallholder farms

By Bernadette Christina and Fathin Ungku

SINGAPORE/JAKARTA (Reuters) - Indonesia will impose higher levies on crude palm oil (CPO) starting Dec. 10, an official document showed on Thursday, a move that could impact demand next year as it seeks to generate funds for its ambitious palm-based biodiesel programme.

Export levies will be raised to a progressive system of $55-$255 per tonne of CPO, depending on price levels. It previously imposed a flat $55 levy on CPO regardless of price.

The new regulation stipulates that if CPO reference price is $670 per tonne or below, the levy imposed will be $55 per tonne. It will increase by $15 for every $25 price hike in CPO.

The levy for CPO in December will be at $180 per tonne starting Dec. 10 as reference price was set at around $870, an official at the oil palm fund agency told Reuters.

The measures are seen as a fundraiser to help subsidise Indonesia's biodiesel programme, which requires diesel to be blended with 30% bio content (B30) to maximise domestic use of the edible oil.

A slump in fuel prices this year has made it less economical for biodiesel and longstanding plans to increase the bio content to 40% (B40) have been delayed due to funding issues.

The levies could impact demand next year for the versatile oil, which is found in a variety of consumer products, from potato chips to soap, as consumers look at cheaper alternatives.

B.V. Mehta, executive director of the Solvent Extractors' Association of India, said demand there was not likely to improve.

India is the world's biggest importer of palm oil. Palm prices have already been increasing this year due to a supply crunch and rainy weather.

"India is a very price-sensitive market, the current high prices are likely to reduce demand further," Mehta told a virtual conference on Thursday.

The higher levy is also not welcomed by smallholder farmers who say that it only benefits bigger oil producers who supply feedstock for Indonesia's biodiesel.

"This policy is misguided," Mansuetus Darto, secretary-general of Indonesia's smallholder farmer association said.

"It only wants to pursue the target of stepping up to B40 and hurting small farmers."

The market however, reacted positively, with the benchmark palm oil contract for February delivery on the Bursa Malaysia Derivatives Exchange rising 0.4% to 3,328 ringgit ($817.09) per tonne on the news.

($1 = 4.0730 ringgit)

(Reporting by Bernadette Christina Munthe and Fathin Ungku; Editing by Martin Petty)