Palm oil production: Crisis lurks as replanting lags
This article has been translated by PwC Indonesia as part of our Plantation News Highlights service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
Bisnis Indonesia - Produksi sawit: Krisis mengintai kala replanting berjalan gontai
4 October 2023
By: M. Taufikul Basari
The problem of slow replanting of oil palm plants in the two main producing countries could threaten the production of the most widely used vegetable oil. Reduced supply could also increase the price of crude palm oil (CPO).
As oil palm trees approach their quarter-century commercial lifespan, they produce less of the versatile oil, which is used in everything, from the production of ice cream to cosmetics and fuel.
Some plants became too large to be managed by workers, who relied on hand scythes tied to long sticks. However, new oil palm trees take several years to produce fruit in commercial quantities.
As reported by Bloomberg, in the palm oil producing regions of Malaysia and Indonesia, where the pandemic caused a shortage of much-needed manual labour for the industry, a large group of farmers delayed the replanting.
Pressured by high costs and declining yields, many smallholders argue that they cannot replant, and have no choice but to continue.
The result is a significant delay of plantation rejuvenation that will reduce harvests in coming years, limiting exports from the two countries that account for 85% of global production, which in turn may reduce profit for farmers and increase global CPO prices.
Market research institute Oil World last month warned of the consequences of an alarming decline in productivity due to slow replanting.
According to the forecast of the Hamburg-based institute, annual production growth may fall to 1.8 million tonnes or less within the 10 years until 2030, from an average of 2.9 million tonnes in the decade up to 2020.
The El Nino weather phenomenon is not helping, and in the planting year ending on September 2024, annual production increase is projected to result in the smallest amount in the last four years.
“The main concern is that production costs will become uncompetitive. Costs are rising, labour costs are rising, everything is increasing, while yields are decreasing because farmers are not replanting,” said Ivy Ng, head of plantation research at CIMB Investment Bank Bhd. in Kuala Lumpur, as reported by Bloomberg on Tuesday (3/10).
Higher prices for palm oil could also mean the destruction of demand, pushing large commercial buyers and households to seek alternatives that are usually more expensive, such as soybean oil and sunflower seed oil, especially in price-sensitive markets like India.
“In the past, oil palms grew very fast, and the advantage was its low prices. But now it is no longer low-cost, and you are still selling to the same market. So, the question is, can buyers afford it?" Ng said.
From the government’s perspective, replanting could mean budgeting a financial aid worth billions of dollars. Smallholders are supporting the industry, accounting for about two-thirds of the area planted in Malaysia and Indonesia, and they form an important voting group.
Meanwhile, in Indonesia, there are additional problems because some smallholder oil palm plantations are in forest areas and the land overlaps with companies’ cultivation rights (HGU).
Replanting costs
Malaysia's largest farmer group is already seeking tax exemptions and grants to speed up replanting, over and above existing loan schemes. On the other hand, Malaysia's Minister of Plantation and Commodities Fadillah Yusof said that the government would seek support for farmers in this month's budget.
"We have proposed certain funding for replanting, especially for smallholders. At the same time, we are discussing initiatives for big players for replanting, because currently the cost of doing business for palm oil and other agricultural commodities is increasing," he said at a conference in Kuala Lumpur.
Oil palm trees begin to bear fruit at 3 years of age, with yields increasing each year and reaching the peak between 9 years and 18 years. After that, fruit volume begins to decline, and at around 25 years, the tree is usually cut down and replaced with a new one.
However, pandemic labour unrest and record high palm oil prices last year have disrupted that schedule.
The Malaysian Palm Oil Association (MPOA) estimates that 664,000 hectares or around 12% of the country's oil palm plantation area consists of trees aged 25 years and older.
The association warned that more than a third of the planted area could be classified as old growth by 2027. MPOA Chief Executive Joseph Tek said the average cost of replanting was about 20,000 ringgit (US$4,265) per hectare, or nearly US$3 billion.
Meanwhile, smallholders in Indonesia would receive Rp30 million (US$1,937) per hectare for replanting, but the Indonesian oil palm association claimed the actual cost could be as much as Rp70 million. Based on the current extent of the aid, the Indonesian government needs to provide at least US$5 billion to help with replanting costs.
Not to mention there are additional problems because some smallholder oil palm plantations are in forest areas and the land overlaps with companies’ HGU.
The problem is not only financial, but this also raises structural questions. Environmental pressure on industries that often thrive at the expense of forests has increased drastically.
Even if replanting does not involve new forest cutting, it means faster options that were relied on in the past, such as clearing more land to increase production, are no longer available.
Then, there is the reality of plantation work. Compared to substitute crops such as sunflowers which can be harvested with a tractor, oil palm is more complicated. A team of workers is needed to cut the fruit bunches, each weighing between 16 kg-35 kg.
Even clearing land that has already been planted requires more precision than the old method used to clear and burn land, namely cutting to avoid pests.
"When prices are good, replanting is postponed. When prices suddenly fall, pockets are empty, and replanting is postponed. This is a vicious cycle," said Carl Bek-Nielsen, chief executive director of United Plantations Bhd., as quoted by Bloomberg.
The CPO price on Bursa Malaysia is currently around 3,700 ringgit per tonne, having fallen from the record peak during the pandemic of around 7,000 ringgit per tonne.
Replanting is a big problem for smallholder plantations compared to corporations.
As an illustration, in the unit of PT Astra Agro Lestari Tbk (AALI) in Central Kalimantan, the company is replanting with a variety that can produce yields 25 months after planting, much earlier than the average variety which requires 3-4 years.
The company is also researching varieties that can keep tree trunks at a height between 10 to 15 meters, even when the trees grow old.
Meanwhile, smallholder farmers are moving more slowly. In mid-2019, the Agriculture Ministry stated that 2.78 million ha of oil palm plantations owned by smallholders needed replanting because the trees were older than 25 years. The target is to replant 540,000 ha in three years.
In August 2023, according to Heru Tri Widarto, Director of Annual and Refreshment Crops at the Agriculture Ministry, only around 216,000 ha have been replanted.
