Business News

Published: Saturday August 25, 2012 MYT 12:00:00 AM
Updated: Friday February 14, 2014 MYT 1:40:55 PM

The future is in our palm

THE STAR recently held its first roundtable talk on palm oil with four prominent captains of the industry Malaysian Palm Oil Council (MPOC) chief executive officer Tan Sri Dr Yusof Basiron, IOI Group executive director Datuk Lee Yeow Chor, Felda Global Ventures Holdings Bhd group president/CEO Datuk Sabri Ahmad and United Plantations Bhd vice-chairman Datuk Carl Bek-Nielsen.

The Star's executive editor Errol Oh was the moderator at the talk which covered the economic importance of the industry; its sustainability, production, demand and supply patterns; and the acute labour shortage it faces.

The following are excerpts from the roundtable talk held at Menara Star in Petaling Jaya:

What are the keys points often overlooked in the economic relevance of the palm oil industry?

Yusof: Both rubber and oil palm as plantation-based commodity industries contributed about 17% of the country's total export revenue last year. Of that, 11% is palm oil. The most critical point is that palm oil and rubber are everywhere throughout the country. Therefore, purchasing power is vested in farmers, middlemen and dealers all over the country. When prices of palm oil and rubber are good, these people really enjoy the benefits of good purchasing power in terms of disposable income available in the rural townships. These townships are booming with new facilities, thanks to the purchasing power of the people.

The benefits must be recognised from the rubber and palm oil sector. Other sectors may not be so widespread in terms of income distributed to all population nationwide. While the distribution of income is important, this industry also provides much needed employment to the people.

Bek-Nielsen: It is important to recognise that this is a RM80bil industry that employs more than 500,000 people. It holds both macro- and micro-economic importance. In the local societies, where there are a lot of villages, it is actually the smallholders who benefit from this. In Malaysia, we have about 30% smallholders while in Indonesia it is 40%. However, in Africa the industry is 80% driven by smallholders. So it has a huge importance in stabilising local communities' cash flow. So, we must not undermine or underestimate the importance of having a socio-economic crop like the oil palm.

Sabri: Within the Felda schemes, there are 112,635 settlers who depend directly on the industry. In the estates, we also employ about 40,000 people. That is big in terms of numbers and the multiplier effect in terms of the industry itself. The average income of a Felda settler based on a 10-acre (4ha) land he owns is over RM3,000 per month, which is more than the country's average income.

On the competitiveness aspect, Malaysian planters are very competitive and we can compete with anybody the Americans, Germans or Japanese. When you talk about plantation, we are the best in the world. We have 50 years' expertise in the industry. Now, we can go from primary, secondary, tertiary to export our plantation services like planting materials and market our expertise to the Asean and African countries.

Lee: As a background, the palm oil industry is one of the very unique field sectors where a lot of value is still accumulated at the upstream side among the farmers. Generally the smallholders or the plantation owners earn more money at the upstream level than those further down the value chain, which is very rare if you look across all the other sectors.

Going forward, there is scope for palm oil to develop in such a way that the downstream sectors will capture more and more of the value. For example, we know from palm oil we can produce oleochemicals. Many are amazed at the variety of applications and benefits it can be applied to. Therefore, I feel there is more scope to expand from that area. If you compare that to the size of the industry and the petrochemical industry, where oleochemicals can potentially be a substitute to some of the segments, we are still very small.

On the edible food side, of course palm oil can be used in cooking oil, specialty fat, and the bakery segments but if you then extend it to food supplements, nutrition, it's a whole new ball game altogether. Food supplements and nutrition market is again a few times larger than the palm oil market. So I think this is the direction that palm oil should expand further.

What are the key trends that will drive demand in the coming years?

Lee: I think the same factors that have driven the industry in the past will continue. Those factors would be world population growth, and higher income in emerging countries. However I think the future world supply factor will play a lot more influence in terms of restriction in the amount of arable land and erratic world climate change.

Bek-Nielsen: There are three factors, in my opinion. The first of which is population growth. We must recognise that we live in a world that has a population of seven billion people. By 2050, the forecast is that it will reach 9.3 billion. This means there will be 2.3 billion more mouths to feed compared to today. At the same time, there are 900 million people who fall into the category of being chronically malnourished. That's 900 million people plus 2.3 billion people to feed. To put things into perspective, that's almost three Indias. No wonder the FAO last year reaffirmed its commitment despite the economic downturn that world food production will have to increase by 70% within the next 38 years to meet the growing demand from the increasing world population.

Secondly, the burgeoning growing middle class. We see hundreds and millions of people being pulled out of poverty, particularly in Asia, over the last 15-20 years. It is a continuing trend for countries like China, India, many other parts of South-East Asia, not forgetting Africa and South America. One general pattern, which they all have in common, is when they have more money, they want to eat better food, and more protein. That drives up the demand. Even the consumption of oils and fats per person per year has doubled over the last 25 years.

Lastly, biofuels are a new factor, which has come into the game since 2003. For the first time ever biofuels have overtaken oleo chemicals. Currently, biofuels rank higher than oleochemicals in terms of the consumption of oils and fats.

Is it true that the more mouths to feed would mean more oils to sell?

Yusof: Due to the growing affluent world population, we require an additional six million tonnes, which is a lot of oil to be added each year. To produce six million tonnes of oil from soya at a yield of half a tonne per hectare we would need additional 12 million new hectares of land every year. Instead with oil palm supplying 50% of the additional yearly demand, for three million tonnes of oil to be produced at four tonnes per hectare we would only need very little land at about 750,000ha. This is still managable within the framework of how the world can bring in new land for production.

The demand will skew more and more towards palm oil because of its sheer availability and ability to supply. It is competitive and is not land intensive. The demand for palm oil is so strong that it now supplies 60% of the world oils and fats export market. Many countries are chronic net importers of oils and fats. Only Malaysia and Indonesia are major net exporters, particularly palm oil.

Therefore, my thinking is that if the world needs to expand oil consumption by six million tonnes a year, only palm oil can help meet the chronic deficit of imports. This is the strongest form of demand, apart from biodiesel of which demand is erratic, and we usually use it to stabilise prices.

When food is in short supply, the price of palm oil and other oils will be so highly bid by all food companies wanting to have access to these oils, it is not even viable to use it for biodiesel. Despite the good intention of biodiesel, it can only be used in developed countries which subsidise to make it cheaper to burn. Otherwise the food and oleochemicals industry will continue to have strong demand. With limited producers and exporters of palm oil, Malaysia is in a good position. Petroleum, being a depleting resource in the next 20 years, prices will be forced to go up again. Then palm oil will again benefit, not only because it is readily available in terms of volume but because all these commodity prices escalate long- or medium-term due to shortage of commodities in general led by petroleum. In fact, you will find all the palm oil barons will be sitting on gold mines because their oils are going to be more expensively sold in the future.

The outlook for the industry looks promising but are there any curve balls out there in terms of demand?

Sabri: China and India both take a huge chunk of our oil. We are geographically positioned to be very competitive. Today, the biggest demand in China is more in industrial use i.e. frying noodles or char kuey. We haven't really gone down into the fat goods, bakery and ice cream fats all these are potential demands which are going to come in. Like what Datuk Lee says, while we look at the traditional markets, we should go deeper into the downstream ingredients business. Margin-wise it maybe small but once we got it branded, then we are OK.

Also, Tan Sri Yusof mentioned that the only oil that will preside in the future is palm oil. Today palm oil commands 30% of the total world oils and fats complex in terms of consumption and about 60% in exports. Between Malaysia and Indonesia (as the world's largest producer of palm oil), we should aim for 50% to be a price leader.

As to whether demand would peak, since we are in the food business it doesn't matter whether it's a recession or not. In fact, during recession people still need to take food but they won't change their cars.

On the supply side, productivity is uppermost in the minds of planters. What can be done to boost it?

Sabri: When I was chairman of the Malaysian Palm Oil Board (MPOB), I always critised Felda on the need to address replanting. Now, I am doing the job! Within the Felda group, 500,000ha belong to the peneroka (settlers). They replant old-age trees with new planting materials. However, Felda-owned plantations are about 350,000ha, and a big chunk of it is still old-age. We are undertaking aggressive replanting.

In the 1970s-80s, if you can get 20 tonnes per hectare, you will be very happy. Today, we need at least 30 tonnes per hectare. In terms of oil extraction rate (OER), previously 18%-19% is good but now, it will have to be 23%-24%. These are the factors which we have to put in to reduce operational costs and increase productivity.

Another issue to tackle is labour cost in relation to productivity. Harvesting is still a big issue. The harvester with the motorised Cantas is more effective in terms of productivity vis-a-vis some other modern harvesters. I also believe that we can still bring in the water buffaloes, which are more effective in certain plantation areas especially in Sabah. During the flooding period in October, November and December, the buffaloes are very efficient in hilly terrains and also brings bio-diversity.

We've always been criticised for being mono-crop, and monocultured. The key issue of course is the age profile, I think. Among the smallholders apart from Felda settlers, the Government is willing to give incentives to accelerate replanting.

Another issue is on the flat national average productivity for the whole country. We (planters) went berserk in the 1980s, because areas which were good for rubber were planted with oil palm because the price of rubber was low at RM2.50-RM3.00 per kg where you can't even pay the rubber tappers' cost. Therefore, hilly areas in Kedah, Gua Musang and Jelebu which are agronomically suitable for rubber should now go back to rubber planting.

In the FGVH plantations, if we remove all these marginal areas, we will be able to get one tonne extra. For the country, MPOC and MPOB should look at the zoning of land according to the agroclimatic conditions.

Lee: It has often been said that palm oil productivity in Malaysia is stagnating at below four tonnes per hectare per year for the past 20 years. Theoretically it has also been said that with the new planting materials, the potential is large. We're talking about planting materials from seeds and tissue culture that can increase the oil yield to more than 30% from the current 25%. So in theory, the overall oil yield per hectare can be increased about eight to 10 tonnes per hectare per year.

The industry is facing a fundamental problem now, which is labour shortage. If you have a lot of wastages arising from lack of labour, then whatever high content there is in the oil, the fruit bunches will not be able to materialise. It's a very difficult problem the industry is facing and there is no easy solution.

One point that I would like to make is that the oil palm upstream sector has to discard “the farmers' mentality trap”. The oil palm plantations are often regarded as agriculture activities where everything is low cost. The land is still relatively cheap despite the previous price increase and we still use a lot of lower skilled labour.

Going forward, if there is indeed still big value in the upstream sector, the plantation owners can be a bit more aggressive in spending more money on technology to reduce the use of labour. In estate operations, a lot of the work processes are still done manually such as estate cost books, bunches checking seeds but there are already technologies out there that can help, such as the barcode system, and the use of smart phones to capture data which can then be integrated into the accounting and information systems.

My point is that labour is scarce so we have to make do with much less number of workers. In the developed countries, their industries are willing to spend money in getting robots for packaging activities. So we can look further in technology to reduce the number of workers in plantation operations.

Another aspect is on some of the essential processes like effluent disposal from palm oil mills. Again, in other industries, some would normally spend about RM7mil to RM10mil on effluent disposal. But in the palm oil mills, we don't spend anywhere near that amount but are willing to sacrifice 10 acres (4ha) of land to create effluent ponds, purely because we think the land is still very cheap at about RM20,000 per acre for agriculture land which is nothing compared to the high effluent disposal cost expenditure by other industries. Perhaps we have to start looking at the next paradigm into a progressive industry instead of the slow-moving agriculture industry.

Sabri: R&D is very important. The MPOB, Sime Darby, Genting and Felda spend quite a lot on their molecular biology and genome research. Last year Felda patented a marker for the gene responsible for the basal rot disease ganoderma.

Within three years, we will have the planting material that will be more resistant to it. This is a quantum leap in boosting productivity. We must accelerate this sort of technology. It's the only way we will be ahead of our neighbours.

Bek-Nielsen: You need to have leadership and a long-term view. If you look at the means and ways to increase productivity, there are palm varieties today that can give planters seven to eight tonnes of CPO per hectare. We don't have to invent these things as they are already there. The difficulty lies in the execution and implementation down on the ground. This bridge has got to be galvanised, worked and improved upon, and the yield gap has got to be narrowed.

We have to look at how to increase productivity in our sector. Back in the 1980s, the land-to-labour ratio was about one employee to four hectares of land. Now, the ratio is about 1:9. We must set ourselves targets and goals. I want to stress that we must not make impossible demands and expects instantaneous results. This is a big industry and moving it into a different direction is like sitting in the back of an aircraft carrier with a pair of flippers and trying to move the ship. It takes a bit of time but the vision, direction and goals have to be there.

Our main issues relate to labour shortage. In Indonesia today, although their planting materials are similar to what we have, they have labour supply with strict harvesting rounds every seven days. If we have that here, we can easily increase our OER by at least by 2%. The palm oil mills in Indonesia are getting 24% to 26% OER but it is strictly full-cycle harvesting. It is impossible for our industry to implement that because we have a chronic shortage of labour. Therefore, we have to change our mindset because this industry has a huge economic importance to Malaysia. We must nurture, cultivate and stimulate progress by finding new ways to increase productivity.

We must ask, what can be done with mechanisation? What can be done to bring out new varieties? What can be done to ensure that we have adequate labour? In the south of the United States, it would have been back-breaking to produce such high agriculture output without the open door policy of taking guest workers from Mexico or Central America. Similarly, in Europe where eastern Europeans come in to work in the farms in Western Europe for certain years that helps to boost productivity. This is the mindset that we all have to accept. The plantation industry in Malaysia has always relied on guest workers in 100 or 150 years back in time. But we should not rest on our laurels. Winston Churchil once said: “Give me the tools and we will finish the job.” But if we don't have the tools, how can we finish the job? By having the extra labour, Malaysia can increase its OER and minimise its losses which will translate into a few billion ringgit a year to the Government.

Yusof: We know that harvesting and proper application of fertiliser in the estates are important. What about water management? In my study and research, many planters assume that water in the plantations is equally distributed. However, it was pointed out to me by an American agricultural researcher that oil palm can reach high peak production or yield when the water is consistently available between 270mm and 300mm. We need to supply adequate water throughout the year to the oil palm trees to get over 30 tonnes of fresh fruit bunches (FFB), which is five or six tonnes of oil regularly. I'm on a campaign to ensure water is made available consistently to the oil palm trees.

We have to get smart and get out of our mental block. The whole industry is perhaps experiencing good times that they forget they are losing billions of ringgit by not maximising on the yields. In India, all the farmers did was to irrigate the plantations and their oil palms managed to yield 32 tonnes. To me, water management is now the third factor of success for the palm oil industry. Yes, we are concerned about labour and fertiliser, otherwise the palm trees will starve. But we have been ignoring water management because we have been blessed with a lot of goodness. Who is complaining now even though water is not sufficient when the price of CPO is so good? If we want to go further, water management is important. By using smart irrigation, we can apply water consistently to reap profits. I have seen real performing oil palms producing 42 tonnes of FFB per hectare per year! Our agronomists, planters and producers should aim for this kind of oil palm trees.

Sabri: Looking at the estate budget i.e. general costs such as fertiliser, harvesting and labour, perhaps we should put in another item: water management cost. Then, we can track whether the estate manager will put this effort to match the performance. I fully agree that water management over the last 30 years may have been ignored by local planters. It is not that we don't have enough water, it is about water management.

What is the single biggest challenge the industry is facing today and what needs to be done?

Sabri: Labour is the key to this industry. Datuk Bek-Nielsen mentioned that we are wasting billions of ringgit in terms of wastage in the fields. We need more clarity in terms of ridding our dependency on foreign labour. The immediate issue is that we have fruits in the trees but we cannot harvest. The fruits will be rotten and you will waste money. We have to think of working together with the regulators on how to make sure that we can be more systematic in bringing in the labour force here. Ultimately it will take time also to get the Malaysian labour force here to work in the plantations. We have tried with the Felda second generation but not many want to go back to the fields. There is a big gap in labour.

Lee: The solution to the labour problem lies in diversifying the sourcing countries where we can get labour. We think that guest labourers who come to work in the local plantations will create very little social problems. The fact is that they are all in a relatively rural area. They are housed in the estate itself. They seldom go to the towns and cities. Their needs are being taken care of in the estate itself be it medical, religious, social, recreational, sports or education for their children. They will hardly cause any social problems.

Another challenge is problems occurring in the downstream sector due to the Indonesian export duty structure. The main people affected in this downstream segment are the refiners. The refiners used to be called downstream players but gradually and increasingly they are being labelled as midstream. They are now processing big volume but with very little margin. It is inevitable that we will see some industry consolidation. The upstream players will look to the midstream as an integrated player, which would place the midstream players on a firmer economic footing. The way to go forward for the real downstream players is to go further downstream and do a lot of research and development. This segment can then be occupied by smaller players meaning those agile in doing product research, marketing and segmental areas.

Yusof: When running a business, you will need to monetise the potential and maximise the revenue in every way that you can for this industry. The only way is to increase yield and solve the labour problem.

In addition, you have to reduce value destruction activities by some of the NGOs. Just imagine, in a world which is short of edible oils, they are starving this supply line by not encouraging production even though all the sustainable factors have been factored in. We face opposition every time we want to open up new areas for development. All these value destruction does not add to monetising the potential of this industry. There are many double standards that stop free trade including the US Environmental Protection Agency (EPA) which is trying to exclude us from participating in the US biodiesel market. So we as an industry need to add value and remove value destruction activities wherever possible.

Bek-Nielsen: Locally and regionally, I fully agree with what have been said by Datuk Sabri and Datuk Lee. Labour is by far the biggest threat right now and it's going to continue in the future. Indonesia's palm oil industry is developing extremely rapidly. There are many difficulties in terms of us getting guests workers to come over here and work in our sector because their sector is developing very rapidly. The problem is that we are very highly dependent on guest workers solely derived from Indonesia. What if the same problem with the maid issue happens? There will be huge losses to everyone. We need to identify the nations that can help to supply some guest workers here. We have to, whether we like it or not. We must look into the opportunity of taking in Bangladeshis again. We have to lessen our dependency on a single source country for guest workers.

Secondly, from an international perspective, the smear campaign against palm oil is one that must be addressed as we must engage and actively participate to help create a more balanced approach. In France, 44% of its population have a negative perception of palm oil. We cannot accept this negativity.

Lastly, we must not become complacent. Our industry has a very high likelihood and tendency to become complacent. We relax when things are good, when prices are high. However, the pendulum of prices can swing south. History has shown us that it has taken place. We should be prepared if it does take place. Malaysia should not be shy about the fact that we are only the second largest CPO producer. However, we should make the concerted effort to be the most efficient producer of palm oil or any vegetable oil in the world. Then only can we absorb the nasty momentum that will come our way when the pendulum of prices swing south. That is when we will be able to keep our nose above the water when others are drowning. Complacency is something we have to work on and knock off some of the rust that seems to accumulate particularly in good times.

Tags / Keywords: Business News, Business, Palm Oil, palm oil, oil palm

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