GVC-Palm Oil

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GLOBAL VALUE CHAIN IN

AGRICULTURE INDUSTRY:A Study of Palm Oil Industry in

Indonesia in Comparison with Malaysia

Prepared by:

Wishnu Agung Baroto

52111608





Table of Contents

Introduction

Palm Oil in Brief

Analysis

Conclusion



INTRODUCTION

Indonesia became number one palm oil (CPO)producer in the world by surpassed Malaysia in

2007.

Palm oil industry has a lot of derivative product that

have more value-added. By exporting 82% of CPO production, Indonesia is

shifting its more value-added industry to other

countries.

Malaysia able to export more value-added products.



INTRODUCTION

What is the difference between Indonesia and

Malaysia in managing palm oil industry?

How to utilize those resources and create more

efficient production process which able to competewith other countries production

Sustainability environment standard?

Using input and output analysis and global value

chain framework Indonesia palm oil will be explored

in comparison with Malaysia



PALM OIL IN BRIEF

What is palm oil

Palm oil cultivation area

Palm oil in global production

Indonesia palm oil at glance

Malaysia palm oil at glance

Palm oil value chain

Global user of palm oil



PALM OIL IN BRIEF

What is palm oil

Palm oil (elaeis guineensis) is edible plant oil that natively came from Africa

which requires specific physical conditions in sunshine, temperatures ranging

between 24 and 32 degrees and distributed rainfall throughout the year.



PALM OIL IN BRIEF

Palm oil cultivation area



PALM OIL IN BRIEF

Palm oil in global production



PALM OIL IN BRIEF

Indonesia palm oil at glanceChart of Indonesia Palm Oil Production and Export



PALM OIL IN BRIEF

Malaysia palm oil at glanceChart of Malaysia Palm Oil Production and Export



PALM OIL IN BRIEF

Palm oil value chain



PALM OIL IN BRIEF

Palm oilvalue chain

Plantation

Oil millCrude

palm oil

Palm

kernels

Crushing Plant

Crude

palmkernel oil

Palm

kernelmeat

Refinery RBDPO RBDPKO

Oleochemical plantFattyacids,

glycerine

Refinery RBD OleinRBD

Stearin

Fresh fruit bunches



PALM OIL IN BRIEF

Global user of palm oil



Analysis

Stage of industry

Palm oil cultivation (upstream industry) productivity

Downstream industry

Analysis of major oil palm plantation in Indonesia

Global Value Chain Analysis

Future Upgrading



Analysis

Stage of industry

Malaysia has export- oriented-approach

Indonesia, in his stage of expanding area of

cultivation, is in import substitution intervention.



Analysis

Palm oil cultivation (upstream industry) productivity

Commodity

Productivity

Small

Companies State Owned

Large

Companies

Palm oil 2,173 4,929 2,693

Year Indonesia Malaysia

1976-1980 3.1 3.4

1981-1985 3.78 3.58

1986-1990 3.8 3.57

1991-1995 3.69 3.51

1996-2000 3.32 3.63



Analysis

Downstream industry

2007 Indonesia Palm Oil Summary

Year Production

of CPO

Usage Downstream Idle

capacityExport Domestic Capacity

2007 16.700 12.400 4.115 13.720 9.605

(000 ton)

Based on the table, in 2007, 82% of the production able

to produce further in Indonesia. However, only 24% was

domestically produced and the rest are exported to other countries. This idle capacity should be taken into

account for further upgrading.



Analysis

Analysis of major oil palm plantation in Indonesia

Indonesian companies and foreign companies in general(except Wilmar group) produce almost similar yield. Yet someIndonesian companies perform better than foreign companies.It shows that technology owned and used in Indonesia palm oil

plantation mostly similar. Group companies produced 7,223,723 MT out of 9,020,000

MT total production of Indonesia in 2002. Therefore, hundredsof small companies produce 1.796.277 were selling their products to larger companies without adding more value of their products.

Indonesia companies established partnership with foreigncompanies to develop and obtain their technology throughstandardized products, foreign direct investment, or other relationship (will be explain more in global value chain analysispart).



Analysis

Global Value Chain AnalysisProcess Upgrading

Year Area (ha) Production (ton) Labor (person) P/L Changes in

P/L

2006 6,594,914 19,520,170 4,232,319 4.61

2007 6,611,614 19,776,640 4,120,647 4.80 0.04

Small companies, in 29 years, able to increased 20 times

productivity while state-owned increased 1.3 times. On the other hand, private companies drop 0.98 times.



Analysis

Global Value Chain AnalysisProduct Upgrading

Year Area (ha) Production (ton) Export (ton) E/L Changes in E/L

2006 6,594,914 19,520,170 16,251,000 0.83

2007 6,611,614 19,776,640 16,515,000 0.84 0.003066151

The product of upstream industry in palm oil industry is almostsimilar. The difference is only on the standardization by the the

RSPO (Roundtable on Sustainable Palm Oil). Therefore, producer

could not expect more in product upgrading because the quality

mostly depends on the external factors, such as climate, age of

trees, and etc.



Analysis

Global Value Chain AnalysisKaplinsky schema

Market Share Decreases Market Share Increases

Unit Value RisesRelative to Industry

Average

Quadrant 1Failed product upgrading

Quadrant 2Product upgrading

Unit Value Falls

Relative to Industry

Average

Quadrant 3

Product and process

downgrading

Quadrant 4

Process

competitiveness



Analysis

Global Value Chain AnalysisFunctional Upgrading

Indonesia palm oil industry in their history has donefunctional upgrading. Starting as producing CPO andCPKO only and export all the products without further processing and then import those consumer productsderived from CPO (food and non-food).

Indonesian biodiesel from palm oil just started in 2008

when Wilmar Bioenergy was established. This newfunction tends to be the future of palm oil industry. Due toglobal warming and environmental destruction, usingrenewable energy, which not gives negative impact to theenvironment, is necessary.



Analysis

Global Value Chain AnalysisFuture Upgrading

Production

R/D

Downstream

Distribution

Innovate



Conclusion

- Indonesia has to become more productive (processupgrading) and differentiation (product upgrading). Itis followed by improvement in functional upgrading.

- Government role in global value chain is as facilitator of infrastructure, both physical and regulation. Importsubstitution as a tools to protect domestic productshould be evaluated its efficiency. Recent newsrelated to this matter is Indonesian governmentwould like to reduce its tax on export of RBD olein

and stearin (downstream products). Other thing thatgovernment can do is a facilitator in partnership withmarket (as it was with Netherlands).



Conclusion

- Utilizing resources and creating more efficient productioncan be done by process upgrading. As it was analyzed,

Indonesia productivity is less than Malaysia. Therefore,

possessing technology, well-planned cultivation, and

R&D are keys to improve efficiency.

- Roundtable on Sustainable Palm Oil should be obey and

enhance into biodiesel will help the sustainability of palm

oil.

- analyzing Indonesia palm oil industry using global value

chain as a producer driven, input-output analysis, and

benchmarking to Malaysia, it is shows the possibility of

upgrading in the future for the benefit of Indonesian

people.



THANK YOU

Documents

GVC-Palm Oil