Friday, March 6, 2009

Palm Oil

Future of Palm Oil Remains Bright
By Ahmad Ibrahim

Just a year ago, palm oil was on Cloud Nine. It was the toast of the country’s economy. The price of crude palm oil (CPO) breached the RM4,000 mark to touch RM4,312 a tone on March 3, last year. Price stayed above RM3,000 for about seven months, an all-time record.

Palm oil companies were dishing out big fat bonuses for their employees. Many were declaring handsome dividends for their investors. Oil palm smallholders were enjoying lucrative returns. Nobody then thought that palm oil prices would ever drop to unprofitable levels. Most in the industry were convinced that the palm oil price would never again dip below RM2,000 a tone.

That just demonstrated the overwhelming confidence many had in the palm oil industry.

Events of recent weeks have shattered that confidence. On Oct 24, last year, palm oil prices slumped to a low of RM1,390 per tonne, a massive drop from RM4,000.

Not so long ago,such a price level would still have been considered lucrative by past standards. That was when the cost of production averaged around RM600 to RM800 per ton. That has since escalated drastically.

A large part of the blame is attributed to the rise in fertilizer cost-a major component of production. When the crude oil price rose to more than US$140 (RM520) per barrel, the price of fertilizer followed suit. Though oil has now dropped below US$40, no similar drop has been seen in fertilizer prices.

Factor in labour costs, and it is easy to understand the big jump in palm oil costs. The average cost of production for last year may have hit RM1,000-RM1,200.

Change in palm oil prices is always big news in Malaysia. This is because for many years now palm oil has dominated Malaysia’s economy, especially in the rural areas. The prosperity of rural Malaysia, for example, is almost synonymous with palm oil.

Any bearishness in the palm oil market is seriously felt there. Every time palm oil prices drop too much, oil palm smallholders are hit the hardest. This is because most depend entirely on their palm oil income. Though many attribute the current price drop to the financial turmoil that has adversely affected global palm oil demand, many believe there are other forces influencing the price movement.

Apart from market demand, it is widely known that palm oil prices are also influenced by such factors as palm oil supply, changes in regulation on import and export, oilseed demand and supply, speculative activities, crude oil prices and the global economic outlook, just to name some.

At present, the global economic slowdown is the major force no doubt. With many not discounting a repeat of a 1930s-type recession, the focus now is on how to revive confidence and remove any lingering doubts among investors about the future of palm oil.

Though prices have recovered slightly since the low of March last year, the industry has outlined six strategic initiatives to help sustain prices for palm oil. These include creating biodiesel demand, better stock management, using the big discount to other oils to expand demand, aggressive marketing, resolving environmental issues, and branding.

The biodiesel policies already enacted should be implemented without further delay. This new demand will not only help reduce palm oil stocks but can also be leveraged as a protection against low prices.

During periods of low prices, a good replanting strategy can be effective in regulating and reducing supply. This in turn can help prop up prices.

It has been suggested that at an average replanting rate of 4% of total matured acreage per year, at least 600,000 tonnes can be taken out from supply.

The industry must continue must undertake aggressive market promotion to capture the market from the more expensive oils. It needs to tackle issues on the environment now being confronted by the industry. And, last but not least, it must invest in branding and brand support. Concepts such as certified and sustainable palm oil should be exploited.

Fortunes can change in unexpected ways. In the case of the palm oil industry, that long spell of good fortune on high prices and bullish demand had to end one day. Many in the industry did not expect it to happen so suddenly, denting confidence that had always been strong in the industry.

But a recent conference in Phuket, Thailand sent a strong message that despite the recent setbacks, the long term future of palm oil remains bright. And why not? Palm oil is the most economic edible oil to produce. This, together with its other nutritional and technical attributes, ensures palm oil can never be matched by the other competing oils.

With new developments in technologies and applications, palm oil’s global competitiveness can only get stronger.

The Malaysian Palm Oil Board has been developing new products based on palm oil, while the Malaysia Palm Oil Council has been opening up new markets. With the industry always closely monitoring business changes, the industry has the armoury to face crisis in whatever form. With the right measures, there is no reason why price recovery cannot happen soon.

Note: The writer is fellow of the Academy of Sciences Malaysia

Source: New Straits Times, Thursday, March 5, 2009
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