Malaysia: Changing conditions for palm oil

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Malaysia's palm oil industry may be able to reap the benefits of unfavourable weather around the globe that is cutting into harvest forecasts and pushing up prices, but the sector also has to heed some storm warnings of its own if it is to maintain production in the long term.

As the second-largest palm oil producer and the world' s leading exporter – accounting for an average of 40% of global output – Malaysia is well placed to continue to play a major role in the edible oil market. That said, the sector is very much subject to the whims of nature, with weather conditions at home and around the globe often having a very real impact on production and price setting.

Such is the case at present, with commodities brokers and consumers eyeing weather reports and long-range forecasts at home and abroad. Over the past month, palm oil futures have hit a one-year high of more than $859 a tonne, before easing off slightly in the second half of August, the rises and falls driven by the cycles of nature.

Various factors are pushing and pulling at Malaysia' s palm oil prices, with flooding across Indonesia threatening to lower output from the world' s number-one grower, which in normal years accounts for around 45% of global production. Some estimates put the harvest losses at around 10% of the total output, which last year was 21m tonnes. A fall off in Indonesian productions levels could see demand for Malaysian palm oil rise, potentially driving up prices.

On the other side of the world, events unfolded that could well see Malaysian palm oil prices climb, with the extreme heat and the long-running drought burning their way across much of Russia and Ukraine killing off much of this year' s sunflower and rapeseed harvests, further reducing stocks for vegetable oil production. In the US too, yields from soybean, another source of vegetable oil, could be down due to low rainfalls and a long, hot summer.

However, on the downside there are also concerns that Malaysia' s own production could be affected by climate conditions late in the year, with the La Niña weather event expected to disrupt harvesting. The Malaysian Meteorological Department has warned that La Niña may strengthen towards the end of the year, causing higher than average rainfall in Sarawak and Sabah.

" During November and December, wetter conditions with rainfall slightly above normal are expected in the Peninsula as well most areas in Sabah," the Bloomberg news agency cited the forecaster as predicting. " During this time, monsoonal floods are expected in low-lying areas, particularly in the states of Kelantan, Terengganu and Pahang."

While shortages may push up prices still further, widespread flood damage and lower yields could reduce overall revenue.

Although it cannot control the weather conditions, the Malaysian government is trying to take other steps to help the palm oil industry increase yields and profitability. According to the minister of primary industries and commodities, Bernard Dompok, given the limitations of land resources, Malaysia needs to look more at doing agriculture business better as much as bigger if it is to capitalise on its palm oil industry.

" Maximising productivity from Malaysia' s plantation industries is the top priority of this ministry in efforts to strengthen the role of commodities in building the country' s economy," he said in an interview with the Borneo Post on August 17. " That priority still remains the same as we have limited agriculture land, in other words, 6m ha throughout the country, out of which 80% of it is used to plant oil palm."

Among the issues that Dompok highlighted were the need to step up research activities in the sector and to improve mechanisation, along with the further developing upstream and downstream commodity segments.

" As a commodities-producing nation, there is a strategic need to focus on expansion of the high-value-added and environmentally friendly commodities sector," he said. " There is potential to create value through large-scale agriculture, higher-yield methods, new technologies and better linkages to the marketplace that will result in greater production and income."

That need to boost productivity is becoming more apparent, with Malaysia facing the risk of being left behind by Indonesia, which eclipsed it as the leading producer some five years ago and is now looking to increase output to around 27m tonnes in five years' time. With Malaysian output predicted to remain flat at between 17 and 18m tonnes annually, and little scope to bring new land into the system for cultivation, the best hope for upping the production volumes will have to come through improvements in modern farming techniques.

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