INTEREST in oil palm cultivation in Malaysia remains strong despite issues of land scarcity and limited human capital.
Many small-time local investors are continuously eyeing pockets of idle land in Kedah, Perak, Kelantan and Pahang to venture into the thriving palm oil business.
While the local oil palm plantation big boys may have extensively expanded their land bank abroad in Indonesia, Laos, Cambodia, Vietnam and Africa, small-time investors find opportunities in upstream and downstream activities in Malaysia.
According to data from the Malaysian Palm Oil Board (MPOB), as at December 2012 the number of smallholders has grown almost 47% to 177,046, from 120,437 in 2007; as at February this year, smallholders have exceeded 180,000. (Smallholders own less than 40.46ha of oil palm plantation.)
Many have deemed it a profitable business, encouraged by the good times when crude palm oil (CPO) prices hit RM3,000 to RM3,300 per tonne.
One such small investor with serious intention to invest in palm oil here is theMalaysia India Entrepreneur Cooperative Ltd (MIEC).
Founded in 2010, the MIEC plans to allocate between RM20mil and RM30mil for its maiden venture into the palm oil industry in Malaysia.
“The cooperative is aware of the tough challenges in the palm oil business, but we remain optimistic given the increasing global demand for edible vegetable oils on the back of decreasing supply,” says its chairman Madhu Marimuthu.
“We hope to mitigate the risk issues through smart partnership. In fact, some of our members and several interested parties that are keen on a joint venture with the cooperative have expertise in the palm oil industry. It is also good that several of our members are already established in the industry.”
Chellam Plantations Sdn Bhd group managing director Venkata Chellamcautions investors about the long cultivation period, especially for new oil palm plantations.
“New investors have to be patient because it will take time to see even a marginal profit over a minimum period of 10 years.”
Chellam Plantations, which is a member of the MIEC, owns about 25,000ha and considers itself a medium-sized plantation player.
Venkata says the plus point for small-and medium-sized plantation companies with smallholdings of about 100ha would be lower operational costs compared to that of other bigger players who own plantations over 1,000ha which require a bigger number of higher management employees and headquarters.
“Similar to most industries, small- and medium-sized players have lower overheads, a more lean structure, are closer to the ground and tend to have a faster decision-making process,” says Chellam, adding that 40.46ha of land would be a good start.
On bank loans for small-time investors, Rabobank International country business director for Malaysia Kao Chee Ming says even though the palm oil industry provides a good margin, the banks will not depend on margin alone. The benchmark for granting loans will always be on the 5Cs – capacity, capital, collateral, conditions and character.
“The oil palm industry is one of our strengths,” says SMI Association Malaysiapresident Teh Kee Sin.
Malaysia is the world’s second largest palm oil producer after Indonesia. “If more small and medium enterprises (SME) venture into the industry, they can generate further growth for the country’s economy,” he says.
SMEs form the backbone of Malaysia’s economy as they make up 97.3% of the total business establishments in the country.
Despite limited human capital issues, Teh says the use of fruit-cutting machines, enhancing road infrastructure, and, intensive research and development could reduce labour dependency and further attract small- and medium-sized planters to venture into the industry.
On possible business activities that could further spur the industry, Teh highlights several downstream activities suitable for SMEs, such as logistics, packaging, fertiliser, cosmetics, food substitutes and animal feeds.
Malaysia Estate Owners Association president Boon Weng Siew identifies two scenarios for new investors.
One is green field development that would give some 22.5% return on investment (ROI) subjected to several factors – CPO prices at RM2,500 per tonne, capacity to produce five tonnes of CPO per hectare per year, cost of land and other related infrastructure at about RM30,000 per ha.
The other is to look at established plantations, complete with infrastructure that would give some 9.64% ROI, with market price around RM70,000 per ha.
Industry expert M.R. Chandran says Malaysia has vast marginal lands to be developed with a potential to generate 24 tonnes of fresh fruit bunches (FFB) per hectare per year.
“With the technology improvement in breeding and selecting as well as advancement in cultivation and management practices, it is possible to achieve that kind of yield,” he says.
According to Chandran, while high land prices and limited human capital continue to persist in Malaysia, there are still plenty of growth opportunities in Africa and South America for oil palm plantations.
“Oil palm trees can grow best in the rainforest climate with warm and wet climate and year-round rainfall exceeding 1,800mm. As such, oil palms can grow in South-East Asia, West Africa as well as in Central America which have the same climatic conditions as ours.”
He says the African and South American regions have great potential to grow oil palm as an “industrial” plantation crop because of the availability of vast tracks of arable land and good source of labour. The population in Africa is estimated to double in the next 35 years. Coupled with subtantial economic growth and rising affluence, the consumption of oils and fats for food, fibre and fuel are expected to double.
“Malaysia is today one of the biggest investors in the African region ahead of China,” says Chandran.
According to a report by CNBC, Malaysia’s biggest spenders in Africa includePetroliam Nasional Bhd and Sime Darby Bhd. In 2011, Malaysia was the third biggest investor behind France and the United States, pushing China and India into fourth and fifth positions respectively.
Chandran says the main driver for palm oil is mainly due to the increasing world population growth, predominantly in the developing world as well as the rising per capita income.
“We expect the world’s population to hit almost nine billion by 2050,” he adds.
Of the world’s 17 oils and fats, palm oil and soybean oil account for 51% of the total world production. Palm oil alone accounts for nearly 28%.
At the same time, oil palm is a dynamic annual tree crop that produces not one, but two competitive vegetable oils with proven benefits. Oil palm is a versatile crop that produces the most economical oil which is used in various products – from margerine, shortenings, cocoa butter-like fats to infant formula. It is also used for oleochemical applications and in the biofuel industry.
Chandran expects demand for palm oil to increase from 50 million tonnes now to 60 million tonnes in 2015, and 80 million tonnes by 2020.
To meet the challenges of such big demand for oils and fats, palm oil production needs to increase without adverse impact in terms of environmental and social disturbance, to ensure food security, he says.
According to Oil World’s publication, consumers worldwide will be highly dependent on palm and palm kernel oils in the second half of this 2013-2014 season.
“Given such a high demand for palm oil, there is no choice but to increase production to meet the demand, especially from the boom in China and India’s economies.
“I believe the rise of China and India will have enormous business implications during the first half of this century,” says Chandran.