EU move fuelling unease among palm oil producers

EU move fuelling unease among palm oil producers

get through that lot: A worker collects palm oil fruit inside a palm oil factory in Sepang, outside Kuala Lumpur, Malaysia. (Reuters photo)
get through that lot: A worker collects palm oil fruit inside a palm oil factory in Sepang, outside Kuala Lumpur, Malaysia. (Reuters photo)

The livelihood of as many as 300,000 oil palm farmers in Thailand could be in jeopardy after the recent decision by the European Union (EU) to look at ways of banning imports of palm oil biofuel from 2021, industry experts say.

"It will surely have an impact on us even though we do not export palm oil to the European Union," John Clendon, managing director of Univanich Palm Oil Plc, one of Thailand's leading palm oil producers, told Spectrum in a telephone interview.

The warning from the industry expert came even though Thai authorities said the move would have no impact on Thailand's palm oil industry, citing the fact that the country does not export palm oil biofuel to the EU and even exports of edible palm oil have been minimal.

Thailand's palm oil industry has remained relatively quiet after the European parliament on Jan 17 agreed to reform the power market and reduce energy consumption to meet more ambitious climate goals. Part of the plan includes a ban on the use of palm oil as biofuel from 2021.

This was in contrast to Indonesia and Malaysia, the world's two largest palm oil-producing countries, where government officials have slammed the decision by the EU while farmers have staged protests in the streets.

The move could have major implications for two of the world's leading palm oil producers and the biggest impact would be on the agricultural sectors as about 40% of the palm oil output in Indonesia and Malaysia comes from small farmers who then feed their produce to the bigger companies for processing.

But Mr Clendon of Stock Exchange of Thailand-listed Univanich said the problem with Thailand is that more than 80% of the nearly 2 million tonnes of annual output comes from small farmers who are scattered around Thailand, especially the South and Northeast.

This he said could be a major problem in the future as companies such as Univanich account for just over 10% of national output and with oil palm giving output for up to 25 years after their planting, the problems the country could face could be of a long-term nature.

Thailand, according to Wareerat Petchseechoung, commodities analyst at Krungsri Research, is the world's third largest producer of crude palm oil, with an output of approximately 2 million tonnes per annum, or 1.2% of global output. Out of this, some 85% of the plantations and crude palm oil extraction mills are in the South.

In a recent report on the industry, Ms Wareerat said during the 2008-2012 period, oil palm plantations expanded in the North, Northeast and Central regions as a consequence of government support for oil palm production as part of its plan for developing alternative energy sources.

She added that as of the end of 2016, oil palm plantation areas totalled 4.7 million rai, producing an annual total of 11.2 million tonnes of palm oil.

ASEAN'S TURF

Asean as a region accounts for 52.5 million tonnes of production of oil palm or about 85% of world production and represents more than 90% of global exports. Indonesia accounts for 52.2% of world exports, with Malaysian exports totalling 37.9%.

The biggest consumers of palm oil are India, the EU and China, with the three representing nearly half of world exports.

The EU has overtaken China to become Malaysia's second-largest export market for palm oil, importing 2.06 million tonnes in 2017, according to the Malaysian Palm Oil Board.

Meanwhile India remained Malaysia's top palm oil buyer at 2.83 million tonnes last year. China was the third.

As the economies of emerging markets such as China and India rise, the demand for palm oil has also seen an increase over the past five years at an average of 5% per annum supported by expanding demand from the food industry and as an alternative energy source.

Mr Clendon said demand in the long term is going to be strong but in the short term there could be pain amid price fluctuations on both fronts, one from the impact of the ban imposed by the EU and the other being the continued decline in prices of commodities.

Fears that the EU will implement the ban caused the price of palm oil in the commodities market to fall by just over 7% during December last year; in the first few weeks of this year alone the price of palm oil on the world market slipped another 4.7%.

Palm oil was trading at US$634 per metric tonne during the past week compared to $665 at the end of December 2017 and $809 in January 2017.

Year-on-year palm oil prices have dropped by as much as 22%.

Although palm oil production and plantations were in vogue not too long ago, when prices were nearly double what they are today, the continued drop in price has taken away a lot of the industry's glamour.

"If you look at the two- to three-year timeframe then you will see some pain for sure, but in the longer term the outlook is good due to many factors such as rising consumption coupled with a slower pace of new plantations," Mr Clendon said.

Oil palm plantations have been in a decline amid concerns over environmental issues as the growth of this industry has been blamed for the destruction of rainforests in Malaysia, Indonesia and other countries.

Opposition from environmentalists has slowed the growth of oil palm plantations. Thailand, however, has bucked the trend as many farmers have shifted to growing oil palm amid the decline in the price of rubber and rice.

In the South, which has long been the hub of rubber growing, many rubber plantations have been converted to growing oil palm, while in the Central region and the Northeast a large number of rice paddies have been converted to oil palm plantations.

The growth in demand and government subsidies to keep prices at an artificially high level have prompted a surge in oil palm plantations in the country.

The Department of Internal Trade (DIT) usually sets the price of crude palm oil and refined palm oil. Industry watchers say this is an impediment to the possibility of raising the standards of Thai farmers who could face difficulties when they try to sell their product on the export market.

LOW PRODUCTIVITY

Fixing the price of palm oil acts as an incentive for farmers to grow the crop but does not motivate farmers to raise their productivity, and when supply exceeds domestic demand, exporting will be the only option.

"At the moment supply has been on the rise and it is likely to rise to about 3 million tonnes of palm oil in the very near future, and that would be the time when there will be a need for Thailand to turn to exporting and that is when the country's farmers need to be competitive," Mr Clendon of Univanich said.

His company has been investing in research and development with new seeds that yield higher output, but that has only started to get out in the market now and may take time before the plants begin to yield.

"The industry needs to shape up soon or there could be problems in the near future," another industry expert said, echoing Mr Clendon.

Thai farmers have a relatively low yield compared to those in Malaysia and Indonesia with Thai crops yielding 4-17% oil compared to around 20% in neighbouring countries.

Moreover, Thai farmers usually cultivate on 20-rai plots while in Indonesia and Malaysia the plots are 10 times the size of their Thai counterparts.

The fixed prices of the DIT cover a certain grade of oil palm, thus discouraging farmers from looking for better-yielding crops unlike the case of Malaysia and Indonesia.

Thailand also faces higher production costs compared to its southern neighbours. The higher costs stem from fertiliser prices and the strong baht as well as administrative fees.

DIT deputy director-general Somsak Kiatchailak said Thailand exported about 100,000 tonnes of crude palm oil last December and in January because of the competitive price.

The price of crude palm oil in Thailand is about 19.50 baht per kg with fresh fruits at 3.40 baht per kg, down from 23-24 baht in the same period of last year because of high supply in world market. The average cost for farmers stands at 2.60 baht per kg.

Fresh oil palm production this year is estimated at 2.2 million tonnes, or around the same level seen during 2017, with oil palm plantations covering around 5.8 million rai nationwide. Up to 300,000 farmers are involved in oil palm farming in Thailand.

EXPORTING THE ONLY OPTION IN FUTURE

With rising production in Thailand, the option of continuing to use the bulk of crude palm oil for biofuel could be unsustainable and exporting could be the sole options available to the country.

Currently more than 95% of production is consumed domestically and the rest exported. The export markets Thai producer are looking to will most likely be impacted as well.

Although sources in the Ministry of Commerce say Thailand will not be hurt by the ban on biofuel and even edible oil made from palm oil, industry pundits have a different view.

Thailand, which until 2017 was unable to export much palm oil, will likely face an oversupply even if the biofuel policy is encouraged by the government. Thailand's production of biofuel stands at around 1.48 billion litres, with 1.45 billion litres for domestic consumption and the rest for export.

"In any given scenario in a year or so we will be a palm oil-surplus country. Even with several hundred thousand tonnes of palm oil being sucked out of the market by the government-sponsored biofuel sector would still leave the country in a palm oil-surplus situation and that means exporting will be the only option left," a source from the industry said.

The Ministry of Commerce is convinced that the current export markets of China and India will be sufficient going into the future and the lack of exports by Thai companies to the EU would therefore have no impact.

But Univanich, Thailand's largest palm oil producer, has a different view.

"If Malaysian and Indonesian companies lose their export market in the EU, don't you think they too would start to shift their focus to the Indian and Chinese markets? Will this not lower the price of the exported palm oil? And what happens to the supply that was in the market for the EU? That oversupply could further depress global prices," said Mr Clendon.

Thailand cannot sustain an artificially high price because that would lead to illegal imports, some of which have been intercepted in the past as smugglers have tried to sneak palm oil through various loopholes as Thailand's domestic price was comparable to the world market or even higher at certain times.

What is beyond the authority of the Ministry of Commerce is the fact that weather changes have helped to spur output of palm oil.

"The key issue for Thailand is how to manage and balance demand and supply for domestic consumption and to stabilise prices for oil palm growers," a source said.

During 2017 there were fears of a drought that could have lead to a shortage of palm oil, but unexpectedly heavy rains prompted another problem -- too much output.

The ministry now accepts the fact that the rise in production would likely make Thailand need to export this year.

Phansak Jitrat, president of the oil palm committee of the National Farmers Council in Krabi province, said oil palm growers are worried about the EU's proposed ban on biodiesel imports in 2021, as it will affect the sluggish oil palm price in Thailand.

He said he accepts the fact that when both Malaysia and Indonesia see their biodiesel exports decline, the two countries may seek substitute markets and it could impact global prices due to oversupply.

Mr Phansak, who is also a member of the national oil palm policy committee, said the future of oil palm plantations in the country is unlikely to bright as the government lacks a clear policy on how to control and manage it properly.

It is completely different from the Malaysian government which has a clear and strong policy to help oil palm farmers from the plantation level all the way to the end consumer. By implementing a policy that is more comprehensive, the price of the product will be stable in that country.

He added that under the current regime it is likely that oil palm farmers will be able to make ends meet, but this is not a long-term solution.

"Thai farmers right now can live with the current price of palm oil, but not in the future when costs, including those for fertiliser and labour, are going to get higher," he said.

go with the flow: An engineer checks pipes offloading palm oil from a ship to tankers. PHOTO: Chanat Katanyu

far as the eye can see: Bukit Senorang palm oil plantation owned by United Malacca. The firm is looking to drones and other crops to overcome challenges from labour shortages to price volatility. PHOTOs: BLOOMBERG

quality control in action: Workers use palm fruit spears to remove bad bunches from a pile at the Bukit Senorang Palm Oil Mill in Pahang, Malaysia.

INCOMING: An engineer offloads palm oil from a ship to tankers at Siam Gas pier in Samut Prakan. PHOTO: Chanat Katanyu

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