M'sia, Indonesia To Face Challenge To Meet Long-Term Global Demand For Palm Oil

By Tengku Noor Shamsiah Tengku Abdullah SINGAPORE, May 25 (Bernama) -- Based on the current production and expansion rate, Malaysia and Indonesia, the world's top two palm oil producers will be challenged to meet the foreseeable global demand 12 years from now, says Pawan Kumar, Associate Director at Rabobank International's Food and Agribusiness Research and Advisory Division. He said global palm oil production had doubled in the past decade and the commodity has now become one of the fastest-expanding agricultural products across the globe. "At present, palm oil production is concentrated in Malaysia and Indonesia, with 85 per cent global output between them. "Palm oil demand is largely driven by the massive economies of China and India, and by 2020 will constitute a whopping 38 per cent of the world's vegetable oil consumption," he told Bernama. Pawan said long-term demand for palm oil would continue to rise with the population in Asia growing and as economies become more developed over the next 10 years. He said palm oil would also see strong demand from developed economies, driven by the industrial use of palm oil products such as oleochemicals and biodiesel. On the industry's future, in particular countries like Malaysia, he said, Malaysia did not have a massive land mass and while it has been leading the pack as the biggest palm oil producer for years, the plantation sector has become relatively mature. "We’re seeing very little land left for expansion. This is a real cause for concern for Malaysian farmers because suitable land could run out in possibly three to four years," he said. Pawan said Indonesia was Malaysia's biggest competitor, with more land available there for opening new oil palm estates at lower costs. He said Malaysia's palm oil industry started years ago and had reached a more mature phase of industrial development even before Indonesia started its high-growth phase. In order for Malaysia to go back to its golden years in production growth, he said, major replanting has to be done, but this may take almost a quarter of a century to replant the entire national hectarage. He said the other factor would be the oil palm fruit harvesters' shortage; this can be overcome if the government eases foreign labour regulations. "At least 80 per cent of estate labourers in Malaysia are Indonesians, and with Indonesia's own palm oil industry on a high growth track, there is stiff competition to retain the labour pool from returning to their homeland. "There is further potential to increase yield levels through best management practices and seed development," he said. With constraints on Malaysia’s own domestic availability, Indonesia is the most immediate opportunity as Indonesia has similar climatic conditions and suitable land available for future growth. Pawan said there are other regions in Asia which have shown potential like Thailand and Cambodia but both have limitations. He said large land base with suitable climatic conditions are available in Africa and Latin America but they have their own challenges which need to be addressed before they can start sizeable contribution. Indonesia has not only seen rising export levels, but also significant growth in the domestic consumption of palm oil products. Indonesia, the world's third largest palm oil consumer, has seen domestic consumption grow at eight per cent compound annual growth rate over the last 10 years. A lot of it has been driven by industrial usage and food consumption, which has grown by five per cent in the same period. Last year, Malaysia's palm oil exports to the world stood at 17.9 million tonnes against an estimated 17.3 million tonnes of exports from Indonesia. Industrial usage in Indonesia was a lot driven by biodiesel production in 2011 because of better economic viabilities of the biodiesel plants. The viability of these plants will have a detrimental impact on the industrial consumption growth. Also, the production growth in Indonesia is much higher than the consumption growth, which will, in all probability, make Indonesia a higher exporting nation in the years to come. Asked whether Malaysia can maintain its leading position as the world's largest producer in view of the limitation in acquiring new land, Pawan said: "In 2010, Indonesia had already surpassed Malaysia as the world’s largest producer of palm oil, with Indonesia accounting for 48 per cent of the world's total production vis-à-vis Malaysia’s 37 per cent." He said Indonesia had one of the highest production growth rates in 2010/2011 with a 10-year compound annual growth rate of 11 per cent as compared to Malaysia’s four per cent. "With Indonesia's much higher availability of suitable land for the development of new oil palm plantations at lower prices, Malaysia will be unable to compete for the pole position it once held," he said. On climate change, Pawan said climatic condition has always been a factor in the agribusiness space. Recently, he said, the unfavourable weather occurrence has become unpredictable, which is a cause for concern. "We had the El Nino event in 2009/10, which impacted palm oil production, followed by the La Nina event in 2010/11 and 2011/12. "These events have had a detrimental impact on competing oilseeds in the Americas (soybean) which influences palm oil prices. We are already seeing that due to dry conditions in Latin America; the production of soybean had gone down by 10 per cent in 2011/12," he said. He said Oil palm is a tropical crop which can be cultivated within a certain band of latitudes on either side of the equator. The most suitable range is suggested to be around +/- 10 degrees from the equator although there are examples of oil palm cultivation within 20 degrees latitude from the equator. Besides Malaysia and Indonesia, Pawan said Thailand was another key producer, while Nigeria and Colombia are the next largest producers although their yields are substantially lower than Malaysia and Indonesia. Vietnam, Myanmar, Cambodia and Laos share similar agro-climatic features with Thailand but have not commenced oil palm production on a commercial scale at this stage. "Outside Asia, the industry has started exploring the possibility of future supply potentially coming from Africa and South American countries. "These regions have similar agro-climatic conditions and have been producing oil palm though on a smaller scale," he said. Pawan said both continents contain five main countries with suitable agro-climatic conditions and potential but there are different sets of challenges with respect to each region. He said Africa presents certain challenges on the social, political and legal fronts, and at this stage has not been fully tested. "South America has higher labour costs as well as labour regulatory and social compliance issues. On key challenges faced by palm oil-producing countries, Pawan said that pricing advantage, driven by lower production cost, was the primary driver for palm oil consumption in price-sensitive emerging economies. Despite production growth, supply constraints due to limited land and other factors are getting apparent. He also said palm oil has long been the focus of criticism over sustainability issues due to deforestation and planting on peatland. "Another key challenge lies in reconciling stakeholders' diverging interests. The demand for sustainable palm oil is rising, led by developed economies, primarily the European Union (EU). "Other key issues that remain for palm oil are the discussions about its high saturated fat content and its low viscosity at low temperatures, which discourages palm oil use during low temperature period," he added. -- BERNAMA