Cluster hurdles and solutions

CIMB’s Ng believes the cluster idea needs government support and intervention to succeed. — AZHAR MAHFOF/The Star

MALAYSIA’S oil palm sector has long been a money spinner, but it continues to face many challenges.

Newly minted Plantation Industries and Commodities Minister Datuk Seri Johari Abdul Ghani has put forward some fresh ideas. Will they work and what are the other solutions?

First, we address the problems plaguing the industry.

The low yields of smallholders have long been a problem. One industry player attributes the low yields to poor plantation management with little or no fertiliser application. “These smallholders get subsidised fertilisers from the government but some sell them for a quick buck,” he adds.

Just how low are the yields?

Smallholders own 27% of Malaysia’s planted oil palm estates, according to Ivy Ng of CIMB Research.

Ng points out that there is a noticeable difference in FFB yields between commercial planters who average more than 20 tonnes per hectare and smallholders who average 8-10 tonnes per hectare.

Johari has suggested smallholder clusters of 8,000ha to 10,000ha. Ng says these clusters will be managed by large plantation companies under commercial arrangements.

It’s a good idea, but the execution is a totally different story.

First, the big planters are set in their ways, and it is hard to imagine them changing to fit into this new role. There are tens of thousands of smallholders. Given the scale of mismanagement of smallholders, managing them will be a challenge. What will be the incentive for big planters to play this role?

CIMB’s Ng believes the cluster idea needs government support and intervention to succeed.

“It must make commercial sense for both the large plantation companies and smallholders. Both sides will want clarity on the terms and conditions as well as their respective roles. “It must be scalable and nationwide, which means government support is needed,” she tells Star Biz7.

As of now, nothing has been finalised, and there is no deadline for when this will begin. “There have been no discussions or approaches to any parties, but this is a good idea since many smallholders are getting older and their children may not want to take over,” Ng says.

“It is an opportunity for large plantation companies to help manage these estates in order to improve yields, ensure sustainable practices and, in turn, get better prices from the markets.”

Felda and Felcra’s work with smallholders can provide a framework for how this can work.

“It really depends on market conditions, but it’s worth exploring,” she says, adding that large plantation companies sponsor smallholders in Indonesia, with this practice being mandatory in some regions.

In playing this role, how much profit or output can they take from the smallholders? Who will pay for replanting, labour and fertiliser application?

According to an industry player, there is another problem. The family may end up feuding over the land and its income when the main farmer passes away.

Also, many smallholders may want to exit because their children are not interested in the business. Finding buyers, however, is difficult unless the plantation is close to a larger plantation or has significant real estate value because it is near development sites.

There are also grouses, chief among them the windfall profit levy. M.R. Chandran claims that this levy is unjustified because it is based on the price of CPO and does not take into account the cost. “This is wrong since the average production cost per tonne varies between RM2,800 and RM3,100.

Penalising oil palm plantation companies for short-term elevated prices is completely unjustified since they do not enjoy a bonanza.

The windfall profit levy should be based on excess profits rather than commodity prices. Oil, gas, coal and metals windfall profits are typically regarded as large profits resulting from unusual market circumstances, such as supply shortages that are temporary in nature.

This article first appeared in Star Biz7 weekly edition.

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