INTERVIEW: Lower yields, smallholder issues major hurdles for Malaysian palm oil: industry head

In Malaysia, palm oil production will continue to be curbed by below-potential yields in the coming years as replanting of old oil palm trees past their prime is far below the expected levels, Carl Bek-Nielsen, chief executive director of United Plantation Berhad and chairman of the Malaysian Palm Oil Council, or MPOC, said in an interview with S&P Global Commodity Insights.

Palm oil accounts for more than a third of the world's vegetable oils production and the industry is centered largely around Indonesia and Malaysia which account for 85% of the world's supply.

While oil palm trees have a per hectare yield many times that of other major oilseeds such as soybean, sunflower or rapeseed, the peak yielding period for an oil palm tree is between the age of 9-18 years. After this, yields start declining and that older tree must be replaced.

The issue of replanting has been at the front and center of industry executives as well as government officials as increasing yields is the only way to grow palm oil supply in the face of strict caps on acreage expansion of oil palm estates.

"About 4% to 5% of our oil palm trees need to be replanted every year. For the last many years, replantation rates have been around 1% to 2% in Malaysia," Bek-Nielsen told S&P Global on the sidelines of an industry conference in Kuala Lumpur March 6.

Currently, the world average production of crude palm oil stands at 3.15 mt per hectare, around half the industry's best yields of 6.1–6.3 mt per hectare, the MPOC head said.

However, regular replanting is especially problematic for smallholder farmers in Malaysia and Indonesia due to the added costs and lack of good replanting materials. While governments of both countries have long pushed incentives for replanting older trees, on-ground uptake of these programs remains disappointing, according to Bek-Nielsen.

"While large plantations can manage these added costs, for smallholders, it's a vicious spiral, -- their yields are low, so their profitability is low. And when your profitability is low, you can't afford replanting," Bek-Nielsen said.

For Malaysia, which has around 5.7 million hectares of land under palm oil plantations, about 300,000 hectares need to be replanted annually, Bek-Nielson estimated, adding that about 30% of Malaysia's oil palm trees would be over the age of 19 years.

Tight supplies ahead

In the near term, production for December, January and February has been poor. And it is projected that March will also not break any records. But palm's annual growth rate is diminishing. This is going to hit the markets in the next 1-2 year's time, Bek-Nielson said.

Palm oil supply will be further constrained by its increased use in making biodiesel in Indonesia and Malaysia where the governments are aiming for higher palm-based biofuel blends in coming years to reduce the carbon intensity of their road transport while supporting their most dominant agricultural sector.

For the next six months, the United Plantations chief executive is expecting crude palm oil (CPO) prices to range between MR3,850/mt and MR4,250/mt ($821.6-$906.9) amid supply constraints.

Malaysian palm oil futures for May delivery on the Bursa Malaysia Derivatives Exchange closed at MR4,291/mt March 14, up 17% from the start of the year.

Impact of EU's deforestation laws

Another big challenge for the palm oil industry is the fast-approaching deadline for EU's Deforestation-free Supply Chain Regulation, popularly known as EUDR.

The rules will come into force at the end of 2024 and while smallholder farmers will be given extra time to comply with the ruling, they will be disproportionately affected by this, Bek-Nielson said.

"For big plantations like us who are certified by RSPO, the new rules will not pose such a problem. There may be a few add-ons but I would say that we are 90%-95% compliant to the EUDR regulations already, so it is not going to be a problem," Bek-Nielsen said.

There are three major challenges for compliance: First one needs to provide geolocation. Second the ownership of the land has to be proved and third is to prove that no deforestation has happened on this land after Dec 31, 2020, Bek-Nielsen said.

"We are talking about 5 million palm oil smallholder farmers in Southeast Asia with millions of parcels of land. To cascade the message down the supply chain, upskill them and help them understand what this is all about is just not going to happen in the next 9 months. It's unrealistic," Bek-Nielson said.

EU is the third largest import of palm oil after India and China. The bloc's use of palm oil as a biodiesel feedstock peaked in 2019 at 2.6 million mt but has fallen to an estimated 1.4 million mt in 2023, according to the US Foreign Agricultural Service's report on EU's biofuels in August 2023.

The EUDR rules, which were passed in June 2023, cover a wide range of EU's imports including wood, rubber, palm oil, soy, beef, coffee, and cacao. The rules stipulate that companies that import these commodities into the EU must ensure that the goods have not been sourced from land deforested or degraded after Dec. 31, 2020.