New Face of (palm) oil wealth - CLSA Indo

Bank Indonesia surprised expectations and raised benchmark interest rates 25 basis points while most of Asia is on holiday last Friday. This is the first rate increase for 17 months and was very much welcomed by the market.  Some confidence is restored here as this signals that the central bank is prepared to increase rates to allow the rupiah to strengthen in order to dampen inflation expectations.

While it is true that we continue to see upward pressure to inflation from rising soft commodity prices, let’s not forget Indonesia is still by and large an agricultural based economy.  It is interesting to note how correlated the JCI is to commodity prices especially CPO and coal.


Our intrepid CPO analyst Di Shui kicked off 2011 with a trip to South Sumatra.  The average small holder owns 2ha of CPO plantation.  ssuming 25 tons/ha/year, 15% milling margin, at US$1200/ton CPO prices, each farmer can take home Rp5.7m or US$630/month.  This is close to 3x GDP/capita!  Plenty of money to spend on cellphones, motorcycles or even 2nd hand cars.  - see attached for details

However, not all is rosy for farmers.  I just came back from a trip from my hometown Surabaya, the capital of East Java.  Talking to friends and relatives who reside in the villages in East Java, I learned that it's been a tough time for some farmers in the province.

True that the prices of several agri products like tobacco had gone up some 60-80% in 2010.  But extreme weather patterns had also cut production by up 50%.  Net net, tobacco farmers saw their income falling, not rising.  Rice farmers did not do much better either. Compounding to the problem is labour shortages. Apparently, it is getting harder (and thus more expensive) to hire workers in the farmland.  Many young(er) farmers migrate to the CPO producing areas, in search for greener pasteur.