IOI, Sime, Felda and others have already begun their expansionary phase by acquiring new landbanks and investing in new supporting and downstream businesses abroad.
IT IS A CURIOUS statistic that close to one-sixth of Malaysia's land mass is planted with oil palm.
That's a whopping five million hectares, or the equivalent of 7.5 million football fields! With the Malaysian economy hugely dependent on revenue from palm oil, accounting for eight per cent or almost RM53 billion of the nation's Gross National Income, it is important for local plantation firms to look at what is needed to stay on top of the game.
Malaysia has already lost its top spot as the number one producer of crude palm oil (CPO) and crude palm kernel oil (CPKO) to Indonesia because of two major factors - land and labour.
Malaysia has just not got enough land. With strict policies to maintain forest cover at about 50 per cent of total land area it is difficult to keep planting more and more oil palm. Neighbouring countries have got a huge advantage in this area. The four Indonesian provinces that make up Kalimantan alone are 55 million hectares in size. If just 20 per cent of the land there is used for oil palm cultivation, that would eclipse Malaysia's total oil palm land capacity.
The only way for Malaysia to resolve its limited land size is for oil palm plantations to expand outside Malaysia. Malaysian plantation companies started this exodus initially to Indonesia where currently 30 per cent of land there is being cultivated by Malaysian companies. However, Indonesia itself is competing in the world palm oil market and is therefore less amenable to let go of its land to its competitors.
Malaysian plantation companies like Felda Holdings and Sime Darby are now venturing further afield to Thailand, Cambodia, Papua New Guinea and increasingly to West Africa. Land in Nigeria is available for lease at US$1 (RM3.05) per hectare per year whereas in Malaysia it costs between RM5,000 to RM10,000 to lease an acre of land for 99 years (which averages out to US$10, or RM30.5, per hectare per year). It doesn't take a genius to figure out which is the more profitable long-term option.
However, obtaining cheap land overseas for planting oil palm is not simple. Typically, only listed plantation companies with sufficient capital and ongoing revenue streams are able to venture outside Malaysia to lease the land, plant, manage and wait three years before harvest.
Another problem that palm oil plantations face in Malaysia is an inconsistent supply of labour. The problem is multifaceted and systemic.
To keep costs down, many plantations resort to sourcing labour from overseas. While salaries of foreign workers are not as high as those of the locals, there are hidden costs involved in hiring foreign workers such as costly labour agency fees and foreign worker levies.
The biggest disadvantage in recruiting foreign labour is that many foreign workers return to work in local plantations back home after being trained in Malaysia. Malaysian plantations see themselves at the losing end when they train workers only to lose them to plantation companies operating in Indonesia. The salary gap between the two countries is closing rapidly and very soon there may not be an incentive for workers from Indonesia to come to Malaysia any more.
Again, the answer to this is for Malaysian plantation companies to venture overseas where labour supply is plentiful at the land supply source. These companies can take their expertise learnt from years of oil palm plantation management and use it in far flung corners of the world.
The Compound Annual Growth Rate (CAGR) for global palm oil products has been 7.5 per cent over the last 20 years. With an ever increasing list of applications not only for the oil but for almost every part of the oil palm, the growth rate is expected to increase.
Malaysian plantation companies are very well positioned to capitalise on this tremendous growth. There will be a need for investment while a certain amount of risk will have to be factored in when venturing overseas but the returns will be high. In fact, this may be the only option available as land and labour becomes increasingly scarce.
Additionally, Malaysia can focus its efforts on developing technology and processes to add value not just to CPO and CPKO but to other by-products. Already, processes have been developed to generate electricity from discarded fresh fruit bunches and create furniture out of discarded fronds and trunks, among others.
IOI, Sime, Felda Holdings and others have already begun their expansionary phase by acquiring new landbanks and investing in new supporting and downstream businesses abroad.
Faced with the realities of diminishing capacity and returns at home, the oil palm plantation players, just as their counterparts in the rubber industry realised years ago, the necessity to evolve and look far beyond the Malaysian shores evolve in order to secure future growth. The writers, Manoharan Supaiya and W Tissa Pereira, are from Agrinexus International, a Malaysian-based oil palm plantation consultancy