In 2021, global palm oil prices are expected to enter a bullish environment because of lower production in the world’s two top producers — Indonesia and Malaysia — from 2022 to 2025, following the current period of abundant palm oil supply, Rabobank’s latest industry report “A palm storm is brewing” showed.
The report, launched on Wednesday (7/6) and a copy of which was obtained by The Palm Scribe on Thursday, found that the expected decrease in production was a result of an anticipated decline in Fresh Fruit Bunches (FFB) yield of aging palm plantations, limited available land for expansion, including the land moratorium on new palm oil concession in Indonesia, and insufficient replanting activities in both countries.
“Typically, it takes four years for palm to become commercially viable, yielding close to 10 tons of FFB per hectare. It reaches its peak between nine and 17 years, and yields above 25 tons of FFB per hectare. FFB yield will decrease below 15 tons per hectare as palm trees become older than 25 years,” Senior Analyst of Grains & Oilseeds, Food & Agribusiness Oscar Tjakra was quoted in a media release.
Tjakra also said that it is estimated that about 36 percent and nine percent of oil palms in Malaysia and Indonesia are older than 25 years old.
The report said that the absolute growth of oil palm plantation areas in Indonesia and Malaysia in 2016 and 2017 was estimated at 29 percent and 51 percent lower, respectively, compared to the average in the past decade. The lower growth was attributed to the limited land availability for expansion, coupled with a relatively low palm oil prices environment.
According to the report, the combination of existing and expected new moratorium, and the policies of “no deforestation, no peatland, no exploitation” required by palm oil buyers will further limit the land availability.
It is expected that global palm oil consumption will grow at a compound annual growth rate (CAGR) of 2.8 percent from 2018 to 2030, with production growing only at a CAGR of 1.4 percent. This adds further upward pressure to palm oil prices, particularly as long-term demand from Southeast Asia’s domestic market, India and Africa outstrips production, the media release said.
Replanting in both country, the report added, was hampered by a combination of the large expenditure required and the relatively low palm oil price environment.
“This poses the threat of a slowing palm oil production as of 2022, when palm oil supplies will reflect the scaled-back investments in replanting activities and expansion,” the report said.
Tjakra believed that the low-price environment before 2022 could lead to a higher operational efficiency in plantation companies to reduce production costs and also accelerate consolidation in the industry.
“In the long run, it is important for producers to replant old plantations to boost supply in the region sustainably,” Tjakra said, adding that replanting programs were also important for smallholders which accounted for 39 percent and 33 percent respectively of total oil palm plantations in Indonesia and Malaysia.
“Despite short-term challenges such as potential income loss during the first three to four years of the replanting period, sustainable replanting programs that could prevent further deforestation and land clearing are important to boost future global palm oil production and improve productivity and welfare for smallholder farmers in the long run,” he added.
As part of the efforts to boost national output of the commodity, the Indonesian government is actively pushing for replanting of smallholder plantations which mostly have low productivity. A limited grant is provided to the smallholders to replant their crops and the farmers have to seek funding from other sources, should they need more than the grant amount. The government aims at getting about 200,000 hectares of smallholder plantations replanted this year.
Indonesia and Malaysia together account for some 85 percent of the global palm oil supply.