The Palm Scribe

The Argument for Palm Oil: Less is More

Indonesia’s announcement that it plans to make permanent a moratorium on new forest clearing for oil palm plantations or logging, already repeatedly extended since 2011, is a bold move that will allow the industry to focus on boosting productivity but also diffuse a large part of the arguments about deforestation and biodiversity loss which have plagued the palm oil industry.

I believe it is time for the industry and governments of palm oil producing nations to start curbing if not halt, the opening of new areas. There is much room to improve oil palm productivity, especially in Indonesia and Malaysia, the world’s top palm oil producers that account for almost 90 percent of the world supply.

Statistics have shown that oil palm productivity in Indonesia has not increased at all, for the past quarter of a century, staying at the 3.4 ton per hectare level of 25 years ago. Malaysia has only increased oil yield per hectare by 0.3 tons or 8.6 percent over the same period.

A large part of the low yields is because we have not been replanting. Based on their average age profile there is a need to replant 150,000 to 200,000 hectares a year in Indonesia. I highly doubt this is happening and I find it highly worrying that by 2022, Indonesia will need to replant 650,000 hectares a year and would need to keep it up for another three more years after that.

It also makes sense to use high yielding and disease tolerant seedlings that have been proven or certified. But if you are replanting an area the equivalent of the size of Jabodetabek, spread out all over Sumatra, Kalimantan, Sulawesi, and Papua, it becomes a mammoth task to maintain consistency.

What is clear is that palm oil is here to stay, there is no doubt about it. Whether people like it or not, palm oil is so entrenched in our daily lives that we hardly even notice it. When we wash with soap in the morning, palm oil is there. When you put on your makeup, it is also there. For breakfast, our chocolate spreads, margarine, milk powders, noodles, oil that we cook our eggs with, even the hand cream, some medicines we take and sometimes the electricity and fuels we use was generated with some blend of palm products. And we have not even yet talked about lunch.  

Palm uses less land but produces more oil compared to any other oil-producing crop. Although soy is by far the closest in volume to palm oil, the world can ill afford to turn back the clock and substitute 18 million hectares of palm oil with around 100 million hectares in soy, rapeseed, canola or corn. We just do not have the space for it, period.

Basically, land for palm oil is also finite. There is very little land on earth that can accommodate palm oil as well as it does in Malaysia and Indonesia. But Malaysia has almost run out of land to plant oil palm, hence the issue of deforestation and habitat loss is more pertinent in Indonesia for obvious reasons.

Although statistically, the industry has not really been planting new areas all that much in the past two years, a permanent moratorium would hopefully halt it altogether. World Resources International (WRI) last year said that Indonesia saw an encouraging sign in 2017, a 60 percent drop in tree cover loss in primary forests compared with 2016. It said the decrease was most likely due in part to the national peat drainage moratorium, which was put in effect since 2016. Primary forest loss in protected peat areas went down by 88 percent between 2016 and 2017, to the lowest level ever recorded.

It must also be said that 2017 was a non-El Niño year, thus bringing wetter conditions and fewer fires compared to past years. Educational campaigns and increased enforcement of forest laws from local police have also helped prevent land-clearing by fire.

Curbing if not halting new oil palm plantings will also help underpin global palm oil prices because the source of the commodity is now finite. By definition, a product that is a basic necessity and has no substitute even in the long term is defined as price inelastic as consumers are still willing to buy it even at relatively high prices.

At any given time, there are approximately five to seven million tons of palm oil stocks (10 to 12 percent of annual production) and 75 to 90 million tons of Soybean stocks in the world (22 to 27 percent of annual production). Compared to Soy, on a per month basis of consumption, there are only enough stocks of palm oil for 1.5 months, compared to 3.5 months of Soy. 

A scrutiny of the price of Crude Palm Oil (CPO) against the monthly stocks of CPO in Malaysia from 2010 to 2015 makes it obvious that the price of CPO is highly and inversely correlated to the amount of CPO stocks.

Every palm oil trader, seller, buyer or analyst tracks the inventory levels of CPO, more so than the weather to make their own determination about prices because their basic assumption is that there will and always be more and more palm oil coming into the market and there is no market equilibrium until all the future sources of palm oil are factored in within that delivery time frame. In short, the supply curve for Palm Oil is very elastic, but what if the supply was now limited, which means your supply curve is very steep and every year your demand curve shifts to the right? 

You don’t even need to know the law of diminishing demand to understand that when a product is scarce and demand is relatively inelastic, there is only one way, the price will go up. 

So, less is therefore more. 

I say let the market forces determine a fair price for the limited supply of responsible and sustainable palm oil because once the world knows plantation land for palm oil is now finite and there is no deforestation, common good will prevail.

 

* Denys Munang, is  Director of Sustainability & Investor Relations at PT Eagle High Plantations Tbk

2 thoughts on “The Argument for Palm Oil: Less is More

  1. Thankyou for sharing this important Article Mr.Denys Munang and I too experienced during my term as Visiting
    (Kunjungan)PM cum Advisor Palmoil Plantation Development of 27525 Hectares of Peatsoil Land.

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