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New Straits Times 08 April 2001

Surviving the low prices of palm oil

By Yong Tiam Kui

DESPITE the current low price of oil palm which is hovering around RM700, industry insiders say the oil palm plantation industry has a bright future.

This is because the current low price of palm oil is a temporary phenomena caused by a massive glut of vegetable oils.

Worldwide, the stocks of the major vegetable oils are as follows: soya bean oil 3.1 million tonnes, rapeseed oil 1.5 million tonnes, sunflower oil 1.4 million tonnes and palm oil 3.88 million tonnes.

Malaysia alone has an overstock of some 1.4 million tonnes of palm oil.

The Government has scrapped the duty structure of crude palm oil to allow it to be priced more competitively. It is also working actively with the industry to come up with innovative ways to reduce the current overstock of palm oil.

Initially, there were plans to get the industry to work with Petronas to set up a production plant for the conversion of palm oil to bio-diesel.

It was felt that bio-diesel would be an attractive option for diesel car owners because it is more environment-friendly, does not require any alterations to the engine and, with the low price of palm oil, would be on par with diesel in terms of price.

And that's not all. The process of making this bio-diesel also produces valuable byproducts such as betacarotene, vitamin E and glycerol. But because the proposed biodiesel production plant will only be ready in two years, the Government has decided to encourage Tenaga Nasional Bhd and independent power producers to use palm oil as an industrial fuel instead.

It has also announced it will buy five per cent of the industry's total output, which amounts to 500,000 tonnes, for this purpose at a fixed price of RM725 per tonne.

Tenaga Nasional Bhd has already agreed to start purchasing palm oil in May to be used as a substitute for conventional industrial fuel at some of its power plants.

The Government is also encouraging the palm oil industry to replant approximately 300,000ha of oil palm which are over 25 years by offering a subsidy of RM1,000 for every hectare that is replanted with oil palm and RM1,100 for every hectare that is replanted with rubber and forest trees. This measure will reduce the country's production of palm oil by 600,000 tonnes.

Malaysian Palm Oil Association chief executive M.R. Chandran says the Government should also take steps to increase the consumption of palm oil here and abroad, and narrow the huge price gap between palm oil and soya bean.

"Soya bean oil has traditionally been sold at a premium. There is a price gap of US$50 and US$60 between soya bean and palm oil. We must take measures to narrow that gap. It has been proven that palm oil is as good if not better nutritionally than soya bean oil.

"But Malaysian housewives prefer to buy expensive oils like soyabean oil or corn oil or groundnut oil" says Chandran.

Universiti Putra Malaysia professor Dr M Nasir Shamsudin says he doesn't expect the price to recover soon.

Looking at price cycles in the past and the effect of climatic pheonomena like El Nino, Dr Nasir believes the price of palm oil could go up to RM1,200 or 1,300 in the second half of 2002. But he also adds that too high a price is not beneficial to the palm oil industry because it could cause consumers to switch to other vegetable oils.

"The optimal price is RM800. It is high enough for producers to make money and not too high to cause production substitution." National Land Finance Co-operative Society Limited chief executive Datuk B. Sahadevan, likewise, says the price scenario can change very quickly because crops like soyabean, unlike oil palm, are not perennial. There's a new crop every six months and as such the picture can change very dramatically if the US soya bean is hit by, say, hurricanes or drought.

But in the meantime, says Sahadevan, the industry will just have to be resillient and wait for better times.

"These price cycles are quite common. We had the same thing in 1985/1986 when the price of palm oil dived to RM400.

"We are still okay. We are losing money now but we made money in the good times. In the last three years, we had a very good run. We have to be resillient for the next one or two years and wait for better times." Chandran, meanwhile, says palm oil producers who are finding it tough should note that most of the more innovative and better managed companies are still able to operate profitably despite current low price levels. He says this is largely due to their ability to establish connections with foreign companies and identify technology and techniques in other industries that can be applied to plantations.

As such, he feels that the industry must build alliances with established R&D institutions, universities and industry players, both locally and overseas, to make possible a quantum leap in applied and adaptive research work.

The priority, says Chandran, should be to develop transgenic palms for better oil quality, yield and minimal height.

Chandran says the national CPO yield has stagnated at 3.6 to 3.8 tonnes/ha in the past 13 years even though new clones developed can produce as much as 6.5 to 7.5 tonnes/ha. As such, says Chandran, the industry should take advantage of the Government's subsidy offer of RM1,000 per hectare to carry out accelerated replanting with superior planting materials and with mechanisation in mind.

"Soya bean yield per hectare in the US, Brazil and Argentina (the main producers) has increased by about 65 to 75 per cent since 1970 whereas the increase in the Malaysian Fresh Fruit Bunch (FFB) yield per hectare was only about 10 per cent over the same period and increase in palm oil yield was zero on a national average basis! "The industry's slogan should be ‘Replant or die' as was the case for rubber in the early 60s." This was echoed by Dr Nasir who says that it is essential that we replant because Indonesia (our palm oil rival) has an average oil extraction of 21 per cent from FFB.

Our extraction rate is only 18 per cent. This is largely due to the fact that our trees are older and less productive. Approximately 7.2 per cent of our oil palm trees are over 25 years old and another 20 per cent are over 20 years old.

And that's not all. While we are still the world's biggest producer of palm oil, Indonesia is catching up very quickly. We produced 10.8 million tonnes last year while Indonesia produced 6.7 million tonnes.

Asked if the plantation industry should consider replanting with alternative crops, Dr Nasir says, he doesn't think so because oil palm is still the most suitable crop for the sector.

"Our climate is very suitable for oil palm and the labour requirement of oil palm is much less than that of rubber or cocoa.

"The oil palm tree is also very hardy compared to cocoa," says Dr Nasir.

Meanwhile, Chandran says annual productivity growth would have to average between four and five per cent if palm oil producers are to be able to pay their workers higher wages over time.

This is a demanding task for oil palm growers, says Chandran, because studies show a long-term decline in the real (inflation adjusted) price of major traded vegetable oils, similar to that seen in the other major agricultural commodities.

"In spite of the decline of the palm produce prices in real terms since the 1970s, production cost has shown insufficient improvement," adds Chandran.

Dr Nasir says the industry and the Government should work together to develop downstream activities such as oleochemical industry which would benefit from low oil palm prices.

And as for the perennial problem of labour shortage, Chandran says, more effort has to be put in to come up with a workable mechanical harvester to reduce labour requirements. The crucial part of the estates operation is harvesting of FFB and that can only be done manually.

The development of a harvesting machine should now be made the priority because unless this issue is tackled with far more vigour than hitherto, says Chandran, the Malaysian palm oil industry seems destined for an uncertain future.

"Currently oil palm requires some 40 times more labour than combine-harvested soya bean, the main rival. The majority of imported crops are now harvested by machine and oil palm must catch up," he adds.

And, as for the question of promoting livestock farming in the plantations, Sahadevan says, National Land Finance is encouraging its workers to supplement their income by raising cattle.

"We give them lots for penning the cows and designate areas where the cows can graze" says Sahadevan.

But, he feels that, it is impractical for plantation companies to get involved in cattle farming because the company has carried out small trials and found it to be unprofitable to do so.

"Open grazing is not as efficient as in Australia, for example, because there's too much rain here and the types of grass are not of the right species. So, feedlotting would have to be done to fatten the cattle and that is too costly." Chandran says smallholders should merge to form large-size plantation enterprises because it will be difficult, if not impossible, for them to survive in the era of globalisation. "There is no future for the present form of scattered small holdings in the 21st century," says Chandran.

Chandran says the country's oil palm sector has a very bright future because unlike the US soya bean sector and the EU rapeseed sector it is not a subsidised industry. So, we can expect the industry to do much better when the Asean Free Trade Area and World Trade Organisation regulations come into force in 2003 and 2005 respectively.

"Our palm oil industry is not subsidised. The US Government is subsidising the soya bean industry to the tune of US$5.26 per bushel which is equivalent to half of the farmers's income.

"The EU subsidises its rapeseed farmers by up to 46 per cent of the cost of rapeseed. These producers are not efficient. Once you remove the subsidy, they won't be able to survive".

It would also be a lot easier for our palm oil to penetrate Asean countries such as Thailand, which does not allow the importation of palm oil, and the Philippines, which has high duties on palm oil to protect the coconut oil industry.


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