Malaysia: Oiling the economy

The agricultural sector is playing an increasingly important role in Malaysia’s economy, not only helping the country to achieve food security for local consumption, but also generating strong levels of export earnings. The palm oil industry leading the way here, though lingering concerns over sustainable production and labour shortages could hamper growth.

Current estimates put the palm oil industry’s contribution to the Malaysian economy at around 8% of GDP, with total output last year coming in at just over 17m tonnes, second only to Indonesia. As of 2010, Malaysia had 4.9m ha under cultivation for oil palm trees and the sector was providing employment for approximately 570,000 upstream workers, with a further 290,000 employed in associated downstream industries.

This year, output is projected to be some 17.6m tonnes, just shy of the 2009 record of 17.7m, the Malaysian Palm Oil Council said in a recent report. Most of this production is destined for the export market; in 2010 16.7m tonnes were shipped to overseas buyers. According to data from the Ministry of Plantation Industries and Commodities, export earnings from palm oil and palm-based products totalled $20.67bn in 2010, more than half of the $37.3bn revenue from the agriculture sector as a whole. Early forecasts estimate the 2011 palm oil export harvest could be worth $21.5bn or more.

However, the market’s expectations of higher production in the second half of this year are also pushing prices down, with advance tariffs for delivery in August easing back in late June to levels not seen since 2010. With a bumper harvest expected domestically and better than average yields forecast for world number one Indonesia, overall earnings could be flat in 2011.

Rising costs and potential labour shortages are also expected to have an impact on earnings this year. Some estimates suggesting that up to 80% of the workforce in Malaysia’s palm oil industry is foreign, with the largest single nationality represented on the plantations being Indonesian. Now, with Indonesia’s economy booming and wages on the rise, Malaysia is struggling to attract new expatriate workers and retain those already active in the sector. While producers can counter this by increasing wages, this measure will come either at the expense of higher prices on the open market or lower profits and less funding for future investment.

Another concern is legislation currently before the Australian parliament that would require labels on processed foods to state if the product contained palm oil. Supporters of the legislation, which was approved by the Australian senate on June 23, say that consumers need to be notified of palm oil content as it contains high fat levels. More contentiously, the draft legislation also seeks to encourage “the use of Certified Sustainable Palm Oil (CSPO) in order to promote the protection of wildlife habitat”.

Malaysia’s plantation industries and commodities minister, Bernard Dompok, said he was disappointed that the senate had passed the legislation, noting the move had failed to take into account the sustainable practices that had already been adopted, and would create an unfair and misleading impression of palm oil among consumers. “The industry has contributed immensely toward meeting global demand for food products and is a source of renewable energy which is environmentally friendly,” he said on June 24. The fact that the labelling requirement only applies to palm oil and not to other vegetable oil additives in Australian food products was also unfair, the minister said, describing the legislation as “discriminatory”.

The bill still has a long way before it becomes law, with the lower house of the Australian parliament yet to debate the draft legislation. Malaysia will be hoping that supporters of the proposal fail to muster the numbers to ratify it into law, that the achievements of recent years in promoting sustainable development are taken into account and that other countries do not consider following Australia’s lead.

The industry’s achievements are not insignificant. Among them, Malaysia has become that largest single producer of CSPO in the world, currently accounting for around 50% of the global total. According to Darrel Webber, the secretary-general of the Roundtable on Sustainable Palm Oil (RSPO) – the international body that regulates and promotes sustainably produced palm oil – that figure will likely continue to rise.

“Malaysia is growing from success to success, and is undoubtedly on the crest of a wave right now in the production of sustainable palm oil,” Webber told a media briefing in mid-June. “Achieving the status as the world’s largest CSPO producer in less than three years since certification commenced, while being the world’s second-largest producer of crude palm oil, is no small feat.”

Malaysia still has work to do to further enhance its CSPO credentials, with its sustainable oil output standing at roughly 2.25m tonnes last year. This capacity will no doubt increase as more producers adopt sustainable practices, however, it is currently unclear if these practices will be sufficient to mollify opponents like those in the Australian senate. Even despite the labelling issue, the rising demand for palm oil globally should ease any inconvenience and sales loss from a single market. Both production levels and earnings from Malaysia’s palm oil sector look set to increase in the coming years.

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