Note:  The U.S. Consulate in Medan prepared this report.

Palm Oil Lubricates the Economic Engine 

Agriculture remains an important mainstay to North Sumatra's economy, employing 52 percent of the workforce overall and between 60 to 90 percent of the workforce outside of the major cities; generating 31.8 trillion Rupiah (about 3.2 billion USD) in provincial GDP; and exporting goods worth nearly one billion USD.  (Note:  Unless otherwise noted, statistics come from 2004 numbers provided by the North Sumatran Central Statistical Bureau.  End Note.)  Palm oil production constitutes a substantial element of that sector.  For 2004, oil palm plantations and small farms used nearly 500 thousand hectares in North Sumatra; less than the 826 thousand hectares for rice production, but considerably more than the 350 hectares devoted to rubber.  The Government of Indonesia (GOI) controls nearly 70 percent of the larger plantations of oil palms (either directly or through joint enterprises), although a substantial number of privately-owned, smaller farms contribute to overall palm oil production. 

Many oil palm plantations have facilities for extracting palm oil on their premises.  After having the flesh removed from the palm kernel and squeezed for crude palm oil (CPO), plantations can ship CPO and palm kernel separately for further processing.  According to Indonesian Palm Oil Association (GAPKI) statistics, North Sumatra exports most of its CPO to Europe, though some gets refined domestically.  Of the 13.6 million tons of CPO produced in Indonesia, only 3.5 - 4 million tons go for domestic use with the rest exported.  Palm kernels go to a crushing plant, which extracts palm kernel oil from the palm kernel meal.

The headquarters of GAPKI, located in Medan since its establishment in 1981, underscores the centrality of palm oil to North Sumatra and Sumatra's leading role in Indonesian palm oil production.  GAPKI, however, plans to move its offices to Jakarta before the end of 2005, in part because other areas of the country have begun to increase oil palm plantings.  Increasing production of palm oil outside of Sumatra will not, however, reduce the importance of palm oil to North Sumatra. 

The Forests and the Trees 

Palm oil producers note that the number of hectares in production in North Sumatra has not grown much in recent years.  For this reason, North Sumatra does not suffer the thick blankets of smoke that afflict other provinces when farmers set fires to clear land for new palm cultivation.  Of course, North Sumatra suffers with the rest of the region from fires in other areas of Sumatra.  An executive of North Sumatra’s leading palm oil producer said that most of the small amount of land newly planted with oil palm in North Sumatra resulted, in fact, from logging.  He explained that after clearing the land, the logging companies plant oil palm in the deforested areas.  Although logging companies did not intend to begin palm oil production, oil palms proved a cheap way to meet reforestation regulations.  

A North Sumatra environmental figure noted that oil palm plantations make a good buffer for environmentally protected areas but complained that the heating of the oil palm nut to extract the CPO remains a dirty process, though he allowed that the industry tries to minimize its environmental impact.  According to GAPKI, palm oil producers work closely with Swiss-based “Roundtable on Sustainable Palm Oil” to find a continued, environmentally sound model for production.  A key palm oil plantation  Estate Manager explained that the squeezing of the oil palm fruits to extract CPO occurs under strict controls that protect the environment and allow for maximum retrieval of CPO. At a large oil palm plantation near Bangun Bandar, North Sumatra, the company burns the empty husks that held the oil palm fruits.  Efforts, however, have begun to develop a method to compost the husks and use the mulch as tree fertilizer.  

The Seeds of the Future 

Roughly 80 percent of oil palm production goes to material used for food consumption and 20 percent for industrial purposes.  Palm oil producers in North Sumatra plan to seek development in both sectors to increase the value of their product.  Since little more land will become converted to oil palm in North Sumatra, increased revenue can only come from increased yields of current croplands and increased value for oil palm products.  

The increase in plantations throughout Indonesia bodes well for the North Sumatra companies that produce oil palm germinated seeds.  North Sumatra’s largest private plantation, for example, can produce annually 35 million germinated seeds, distributed in Indonesia and other palm oil producing countries, and accounting for over three percent of its sales. 

GAPKI figures see a bright future for palm oil.  Pointing to heightened concern around the world over trans-fatty acids (TFA) and the January 2006 U.S. Food and Drug Administration requirement that food labels include information about TFA, they argue that palm oil will begin to replace partially hydrogenated oils in American processed foods, thus increasing exports to the U.S.  They also see a strong growth potential in biofuel and biodiesel development.  CPO serves as a biofuel, and methyl esters (derived from palm olein) can mix with diesel fuel to make biodiesel.  Given the current prices for oil and gas, GAPKI leaders think demand will grow for alternative energy sources and, in particular, for biofuels. 

Comment 

Unlike rubber plantations, which struggle to maintain profitability, oil palm remains an essential plank of economic stability in North Sumatra, providing employment opportunities and a valuable export commodity.  Producers can minimize environmental impacts while streamlining operations, such as reducing fertilizer use by composting husks.  Whether it becomes economical to use palm oil to produce biofuel or biodiesel will depend on the oil markets and the costs of other available agro-based alternative fuels.  Europe, Asia, and Africa readily accept palm oil products in food manufacturing, and the prospect for increased sales in these markets should provide North Sumatran oil palm plantations steady income for some time.

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