The palm oil industry is now at a crossroad, with world production slowing down and unless steps are taken to address its main issues, it could face dire times, experts speaking on the second day of the Indonesian Palm Oil Conference here said on Friday (2/11).
Thomas Mielke, from ISTA Mielke GmbH, the publisher of Oil World, addressing the 2019 price outlook session of the conference, said that the palm oil industry was now facing a lot of serious challenges that were slowing down its growth. He cited low yields, labor shortage, acreage limitation and slow replanting of obsolete or unproductive crops.
“The palm oil industry is at a crossroad,” Mielke said, adding that “the future of palm oil will be mainly decided by whether or not effective measures are taken to overcome the problems.”
While it has been a big success as a vegetable oil producing crop, palm oil was now seeing its global area increase stay relatively small in relations to other agricultural sectors and that it was experiencing a slowing growth.
The strong recovery in world palm oil production in 2017 and early 2018 following the El Nino weather phenomenon in 2015, he said, was only temporary. One of the reasons, he said was the failure of producing countries, including Indonesia which is the world’s top producer of the commodity, to replant its old crop, particularly those of smallholders. Official data in Indonesia put palm oil acreage planted and managed by smallholders as accounting for some 42 percent of the country’s total and some 31 percent of its national palm oil output.
Mielke pointed out that from the government replanting target for smallholders, set at 185,000 for this year, only 15,000 hectares have been replanted as of September this year.
He warned that if this replanting is not accelerated, the smallholders are going to see a further decline in yields.
Replanting must accelerate, thus reducing the mature area in the short term but raising yields and production long term.
“When new planting is being reduced…this combination creates a scenario where the growth of palm oil production will decline. We already see in the past three years a slow down in palm oil production,” Mielke said, adding that compounding the situation further, the aging of trees in several parts of the industry will lead to an even more difficult situation
“In the next five years palm oil is a very profitable crop, on acreage, but this advantage against canola and rapeseed is dwindling rapidly,” he warned saying that while palm oil production has only risen slightly in Indonesia and was even in decline in Malaysia and some other countries, soybean was increasing in yield in main producing countries.
“The position of palm oil is going to be challenged if nothing is done to address the challenges,” he said, adding, however, that ample stock could cushion the impact temporarily.
Togar Sitanggang, Deputy Chairman of the Indonesian Association of Palm Oil Producers (GAPKI), speaking at the same conference also said that failure to replant would create problems for the industry in the future.
“The problem we will see five to ten years from now if the replanting program of the government is not happening. It is very important for us in GAPKI to have this replanting become a success,” Sitanggang said.
He said that he estimated this year’s national palm oil production this year would reach around 42 million tons, with the bulk, around 30 to 35 million tons produced by large private companies.
Mielke said that if one put everything together, there would still be growth, but this growth is slowing down
Mielke forecast that annual growth in palm oil production will slow down to 2.9 million tons in 2018/2019 compared to the 4 million tons in 2017/2018. He also believed that palm oil prices which have been weak in the past months were likely to bottom soon and that in the next nine months prices may recover slightly.
James Fry, Chairman of LMC international ltd., speaking at the same conference, also agreed about the palm oil production estimate.
“I think world output of CPO will grow by two million tons. Last year it was by four million tons,” he said referring to Crude Palm Oil.
Fry said that today the main underpinning for CPO prices is coming from petroleum and the United State is increasingly playing an important role in determining crude oil prices.
He believed that petroleum prices will fall back because of the productivity of US shale oil and the lack of unity in OPEC, the Organization of Petroleum Exporting Countries.
“ US shale oil output has responded very rapidly to the higher crude prices that emerged. At the same time, higher petroleum product prices have moderated the growth in world demand, leading to supply surpluses in both 2018 and 2019,” he said adding that this implied that crude oil prices should soon fall back from the level that they had recently touched.
CPO producers, he said, must hope for a higher premium for vegetable oil prices over Brent.
Meanwhile, Mielke pointed out one positive aspect of the palm oil industry, the rising use of biofuel. He said rising demand for biofuel could continue to buy the palm oil industry.
“In the biofuel sector, palm oil is unusually attractive… consumption of palm oil and other vegetable oils are rising sharply in the energy market. Palm oil is now being increasingly used for biofuels, low prices are buying demand,” he said.
Indonesia is making a 20 percent mixture of biofuel from palm oil mandatory for diesel fuel mandatory as of September 1, 2018. The policy of this fuel mixture, known as B20, has so far not been fully implemented yet, with Togar Sitanggang, the Deputy Chairman of the Indonesian Association of Palm Oil Producers (GAPKI) saying that so far only around 83 percent of the biofuel supply purchase target had been met for various reasons.
Sitanggang also said that the implementation of B20 in Indonesia “will be the main driver of the market, at least for the next six months.”
The government, he said, was even contemplating advancing the date for B30 from 2020 to now 2019.
Fry also concurred, saying that biodiesel became more competitive as fuel and predicted that Indonesian palm biodiesel production will increase significantly in 2019. The mandatory B20 policy of Indonesia will also pull palm oil stocks down.
“I expect that with demand led by Indonesian biodiesel, Malaysian Palm Oil Board (MPOB) palm oil stocks will peak by year-end and then drop,” Fry said.
Fry, speaking about the impact of US President Donald Trump’s trade war with China, saying that the president’s policy has pushed US soybean prices sharply below Brazilian FOB values. Soybean is the main competitor to palm oil.
“The biggest losers from the trade war with China are the soybean farmers in the United States, with revenues cut by over 20 percent,” Fry said, adding that these farmers were actually the support base of the president.
The problem of the US soybean farmers has been further compounded by the biofuel policy of the administration. By cutting the effective biofuel mandate, the Trump administration has managed to ensure that US soy oil prices are the weakest they have been for many years.