PALM oil will remain the main driver of growth in the agriculture sector despite concerted efforts by the government to boost the output from other sources such as fisheries and food-based agricultural activities.
Economists said new developments in the agri-based industries would become increasingly important and more loans would be disbursed to finance activities but it would take time for these activities to produce results.
The new developments such as efforts to increase food production will definitely be more important in the Malaysian economy in the future but current efforts are expected to only show results in a year or two, said Rating Agency Malaysia economist Liow Hock Bee.
The total output of the agriculture sector is measured by the output of five of its main components: crude palm oil (CPO), crude palm kernel oil, rubber, saw logs and cocoa. Last year the sector grew by 5.7% year-on-year and contributed a total of RM28.1bil to Malaysia's total exports.
During the first quarter this year, the agriculture sector posted an annualised growth rate of 3.2% and contributed RM13.7bil to total exports, putting it well on track to achieve the forecast RM19.95bil for 2004.
Economists said while the importance of the palm oil sector to overall growth in the agriculture sector would not be replaced any time soon by other smaller agriculture activities, palm oil producers would face greater challenges in view of the volatile CPO prices in the world market.
Already the CPO price has dropped by more than 20% from its high in early May and observers believe a continual fall in prices could negatively impact the overall growth in the sector, albeit marginally.
A sectoral analyst at Mayban Securities said CPO prices would likely be negatively affected by the falling demand particularly in Malaysia's two biggest markets, India and China, in view of new developments in the two countries.
The main concern in India was the recent move to lower import duty for soybean, which would make it cheaper to produce soybean oil in the country while in China, demand for CPO could be affected by government measures to cool its economy.
As for contribution from rubber, the production of the commodity would remain relatively unchanged as prices of latex were averaging at 476 sen per kilo during the first quarter this year.
Malaysia would remain a net importer for cocoa and saw logs in view of the lower production of the two commodities locally.
Still, despite the falling demand for CPO, palm oil production would likely high towards the end of the year, partly because of the higher maturity of some of the oil palms replanted as well as the high production season, which peaks around August and September.
In terms of contribution, average palm oil prices now at around RM1,900 per tonne would remain high for the year, thus the impact would be reflected in the total exports for the agriculture sector.