Over the past few decades the plantations and agriculture sector has become a major contributor to economic growth in Malaysia. In 2011 the industry made up around 7.3% of GDP and employed around 11.5% of the workforce, according to the Malaysia Investment Development Authority (MIDA). Major commercial crops include palm oil, rubber, timber, cocoa, tobacco and pepper. For the past two decades palm oil and rubber have been Malaysia’s top agricultural exports, and in recent years the palm oil industry alone has accounted for 3-8% of GDP. Staple (food) crops include rice, fruits and vegetables and sugar, among others. Boosting agricultural output further has become a central tenet of the government’s long-term development strategy.

The sector is expected to benefit from a series of government-led investment programmes in the coming decade, with the long-term goal of facilitating a shift away from isolated agricultural practices to agribusiness, which will entail increasing integration throughout the value chain. As the government’s development initiatives come into effect, agriculture is expected to account for a steadily increasing percentage of economic activity.

OVERSIGHT: A broad variety of government organisations are involved in the sector in Malaysia. The Ministry of Plantation Industries and Commodities (MPIC) oversees the development of the country’s plantation crops, which include palm oil, rubber, timber, cocoa, tobacco, pepper, kenaf (a fibrous, jute-like plant) and sago (a local starch). The ministry also supervises a number of industry-specific institutions that include, among several others, the Malaysian Palm Oil Board (MPOB), the Malaysian Rubber Board (MRB), the Malaysian Timber Industry Board (MTIB) and the Malaysian Cocoa Board (MCB). Additionally, MPIC works closely with a variety of promotion associations that include the Malaysian Palm Oil Council, the Malaysian Rubber Export Promotion Council and Malaysian Timber Council.

The Ministry of Agriculture and Agro-based Industry (MOA), meanwhile, oversees all non-plantation agricultural industries, including rice, fruits and vegetables, livestock and fisheries. Additionally, the MOA is charged with developing both Malaysia’s food security situation and agribusiness capacity in the coming years. The ministry manages many organisations, which include the Malaysian Agricultural Research and Development Institute (MARDI), the Federal Agricultural Marketing Authority, the Farmer’s Organisation Authority Malaysia and Agrobank, among others. Other major players involved in the agriculture sector include the Ministry of Environment and Natural Resources and the Federal Land Development Authority (Felda).

DEVELOPMENT PLANS: In 2010 the government began several large-scale national economic development plans, all of which include policies related to agriculture. The Government Transformation Programme (GTP), launched in January 2010, comprises seven National Key Results Areas, including one aimed at raising the standard of living in rural, low-income areas. By the end of 2010, as a result of GTP-related initiatives, the government had succeeded in pulling 44,000 households out of extreme poverty. In 2011 some 63,147 poor households were enrolled in the newly created 1AZAM programme, which aims to boost economic opportunities for low-income populations in conjunction with a number of government organisations. The MOA is providing agricultural equipment, livestock, seeds, fertiliser and training to residents of agricultural areas that are eligible to benefit from the 1AZAM programme.

The 10th Malaysia Plan (10MP), launched in June 2010, is a five-year development initiative (2010-15) that follows up on the Ninth Malaysia Plan (9MP), which ran from 2006-10. The 10MP is closely linked with the Economic Transformation Programme (ETP), which also started in 2010, which serves as a blueprint for the country’s development through 2020. The ETP is made up of 12 National Key Economic Areas (NKEAs), one of which is aimed at significantly expanding the palm oil segment and another of which is meant to focus agriculture development efforts on areas that have the biggest impact on national income, including aquaculture, rice, fruits and vegetables, and the production of premium processed foods (see analysis). Each NKEA is made up of a series of entry point projects (EPPs), or individual development initiatives.

In addition to the NKEAs, the ETP involves six strategic reform initiatives, which the government defines as “policy measures that will make Malaysia more competitive”. These include projects intended to improve competition and standards, the government’s role in business, public service delivery and human capital development. While the government developed the ETP, the great majority of the projects laid by the plan will be funded and carried out by public-private partnerships or by private companies. In particular, the state is planning to partner with small and medium-sized enterprises in an effort to build local businesses.

SECTOR SPECIFIC: In addition to the three overarching economic development plans, in 2011 and 2012 Malaysia initiated two agriculture-specific initiatives, namely the National Agro-food Policy (NAFP) and the National Industrial Commodities Policy (NICP). Both 10-year strategies pick up where the Third National Agricultural Policy, which ended in 2010, left off. In particular, the NAFP and NICP aim to increase competitiveness and export earnings, encourage agricultural players to move into agribusiness and ensure food security for years to come. Food security is considered a national priority. As of 2011, the country was a net food importer. The state is working to boost the production of staple crops, such as rice and sugar, in an effort to ensure that Malaysians remain well fed for the foreseeable future (see analysis).

TOP COMMODITIES: As of the end of May 2012, agriculture and plantations exports accounted for 7.4% of total exports, according to the Malaysia External Trade Development Corporation (MATRADE). This is down slightly from 7.8% at the end of 2011, but in line with fluctuations over the course of 2011, when the figure varied from 6.1-9.1%. Palm oil, rubber and timber are the largest agricultural contributors to Malaysia’s GDP. In 2011 commercial commodities, including palm oil, rubber and cocoa, accounted for total exports of RM141.2bn ($45.55bn), according to MPIC. In the first five months of 2012, palm oil exports brought in RM23.33bn ($7.52bn), 8% of total exports, according to statistics from MATRADE. This figure is down slightly on the same period in 2011, when palm oil exports brought in RM24.64bn ($7.94bn), or 8.8% of total exports at the time. Rubber and rubber product exports reached RM8.34bn ($2.69bn) in the first five months of 2012, 2.8% of total exports, up substantially on RM6.88bn ($2.21bn) and 2.5% during the same period the previous year.

EXPORTS & IMPORTS: As of the end of the first quarter of 2012, the agriculture, forestry and fishing segments (minus major commercial commodities such as palm oil and rubber) were valued at RM22.6bn ($7.29bn) in terms of GDP at current prices, down slightly from RM24.6bn ($7.93bn) at the end of 2011 and RM23.2bn ($7.48bn) at the end of 2010, according to Bank Negara Malaysia (BNM), the central bank. Total food exports (not including most commercial commodities) reached RM20.6bn ($6.64bn) in 2011, up substantially from RM16.4bn ($5.29bn) the previous year. Major food exports include cocoa, coffee and tea, seafood products, and edible products and preparations. Despite steadily increasing production at home, Malaysia continues to be a net food importer in some segments. In 2011 the country spent RM34.5bn ($11.12bn) on food imports, up from RM27.4bn ($8.83bn) the previous year, according to MIDA. Major food imports include cereal, coffee, tea, cocoa, spices, fruits and vegetables.

INVESTMENT & EMPLOYMENT: The plantation and commodities segment attracted investments valued at RM989.5m ($319.2m) in 2011, while other agricultural segments registered investments totalling RM417.5m ($134.6m). In 2011 the agriculture and plantations sector as a whole employed some 1.4m workers, according to MIDA.

PALM OIL: As of mid-2012, Malaysia was the world’s second-largest producer of palm oil, after Indonesia. Together the two countries produce around 89% of the world’s palm oil. In 2011 around 38% of the world supply of palm oil and 48% of global palm oil exports came from Malaysia. According to statistics from the MPOB, the country’s total oil palm planted area had reached 5.02m ha by March 2012, which marked an increase of 3% from 4.85m ha at the end of 2010. The majority of this expansion took place in Sarawak.

As of March 2012 just over 50% of the total oil palm planted area was in Peninsular Malaysia, while around 29% was in Sabah and 21% was in Sarawak. Close to 62% of the total oil palm planted area was owned and operated by private estates, while some 13% was held by independent smallholders, 14% was held by Felda, and the remainder was controlled by a number of other smaller agencies and organisations.

PRODUCTION: In 2011 Malaysia produced 18.91m tonnes of crude palm oil (CPO), up from 16.99m tonnes the previous year. Similarly, the industry produced 4.71m tonnes of palm kernel in 2011, up from 4.29m tonnes in 2010; 2.14m tonnes of crude palm kernel oil in 2011, compared to 2.01m tonnes the previous year; and 2.39m tonnes of palm kernel cake in 2011, up from 2.24m tonnes in 2010. Total palm oil-product exports reached 24.27m tonnes in 2011, up 5.3% from 23.06m tonnes in 2010. Export revenues totalled RM80.4bn ($25.9bn) in 2011, up 34.5% from RM59.8bn ($19.2bn) the previous year. The jump in export revenues was due to steadily increasing export prices and higher export volumes, especially to China (up 14.3% in 2011 from 2010), India (up 42.6%), the Philippines, Turkey, South Africa and Vietnam.

PLAYERS: A number of major palm oil companies are active in Malaysia, including Sime Darby, the world’s largest listed palm oil producer, which contributes around 13% of the country’s total palm oil production and a full 6% of global production. Sime Darby, which is listed on Bursa Malaysia, the country’s stock exchange, operates 129 estates in the country, covering 314,035 ha of cultivated land. Additionally, the firm is active in Indonesia and Liberia. Other major palm oil players in Malaysia include Felda, IOI Group, KL Kepong, Boustead Group and Southern Acids. Felda, a government agency with a mandate to assist low-income rural populations, controls some 880,000 acres of plantations. In June 2012 roughly 33% of Felda was privatised in a $3.1bn initial public offering (IPO) – the year’s largest new listing behind the Facebook IPO. Around 80% of the company’s income comes from CPO sales within Malaysia.

CHALLENGES: The palm oil industry faces a number of challenges. In October 2011 Indonesia cut export duties on palm oil products in an effort to boost exports of processed oil, significantly undercutting Malaysia’s tax structure. In late 2011 and early 2012 palm oil exports fell off slightly, likely as a result of the change. In October 2012 the MPIC announced they would introduce a new tax structure in January 2013, which will reduce the export duty on crude palm oil and abolish a duty-free shipment quota. The new rates are expected to range from 4.5% to 8.5%, whereas the existing rate is 23%.

“The lower taxes in Indonesia make it harder for us to compete,” said Leon Kian Ming, the CEO of Southern Acids. “It has the potential to result in a total or partial movement of the Malaysian oleochemical industry to Indonesia.” Other challenges facing palm oil producers in Malaysia include environmental issues, a lack of land for new plantings and a shortage of local labour.

Some see potential in developing environmentally friendly installations as the government prepares to enforce new regulations. “Zero-emissions processing facilities could become a major opportunity in coming years as environmental regulation begins to tighten up,” said Chai Beng Lim, the managing director of CB Industrial Product Holding. “The recent boom in the palm oil industry has translated into increased spending by existing plantations for technological upgrades of their processes to make them more efficient and environmentally friendly.” Industry players are beginning to invest in environmentally friendly refinement techniques. CB Industrial, for example, has developed a system that requires less machinery and produces higher CPO yields per tonne than traditional methods. The company’s clients include Felda, Sime Darby and Sarawak Oil Palms in Malaysia, as well as corporations operating in Indonesia, Costa Rica and Papua New Guinea, evidence of a growing demand for green technologies that don’t sacrifice efficiency. “Malaysia’s 4.7m ha of plantations and 420 palm oil mills could potentially generate 1260 MW of electricity, which is nearly 10% of the country’s currents energy requirements,” said Franki Anthony Dass, executive vice-president of Sime Darby Plantation.

All of Malaysia’s large-scale economic development plans include palm oil-related initiatives. The industry is the subject of one of the NKEAs, which itself is made up of eight EPPs, including those aimed at accelerating the replanting of oil palm; improving fresh fruit bunch yield; boosting worker productivity throughout the value chain; increasing the oil extraction rate; developing biogas facilities at mills; increasing production of oleo derivatives; expanding the biofuel industry; and introducing new downstream activities. The palm oil NKEA aims to boost the segment’s contribution to gross national income (GNI) to RM178bn ($57bn) by 2020, in addition to creating 41,000 new jobs, some 40% of which will require highly skilled employees. According to ETP planning documents, reaching this goal will require around RM124bn ($40bn) of investment through the year 2020, 98% of which is expected to come from the private sector. The government plans to support the palm oil NKEA with RM2.9bn ($93m) in capital expenditure and an additional RM2.7bn ($87m) in tax and cash incentives as well as soft loans.

RUBBER: Malaysia was the world’s largest rubber producer until 1991, when it was surpassed by Thailand and Indonesia. It has held the third-place spot ever since. In 2011 Malaysian rubber exports were worth RM18.24bn ($5.88bn), which equates to around 2.6% of total exports, according to the MRB. This is a significant increase on RM13.37bn ($4.31bn) in 2010. The Malaysian rubber industry is expected to benefit substantially from a series of ongoing development initiatives in the coming years. Under the ETP, for example, the government hopes to boost the industry’s contribution to GNI to RM52.9bn ($17.06bn) by the year 2020. Rising levels of investment and production in the coming years have the potential to turn Malaysia into the world’s top producer once again (see analysis).

TIMBER: Timber markets have stagnated slightly in recent years as a result of slowing construction activity around the world since the 2008-09 economic downturn. In 2011 Malaysia exported RM20.03bn ($6.46bn) worth of timber and timber-based products, according to statistics from MPIC, down slightly from RM20.5bn ($6.61bn) in 2010, but up from RM19.5bn ($6.29bn) in 2009. Major export destinations include Japan, the US and India. As the construction and real estate markets recover, demand for Malaysian timber is expected to grow further. The country is among the largest furniture exporters in Asia, and one of the top 10 in the world.

SUSTAINABLE STANDARDS: Recently the industry has been working to align itself more closely with international standards in an effort to implement sustainable and environmentally sound methods while simultaneously boosting Malaysia’s reputation in foreign timber markets and, consequently, export revenues. By clamping down on deforestation and illegal logging, the industry hopes to gain access to new international markets, in addition to repairing its reputation among environmental organisations at home.

“The level of coordination amongst forestry administrations at both federal and state levels along with other stakeholders involved in the industry has been steadily improving,” said Abdrahman bin Abdrahim, director-general of forestry in Peninsular Malaysia. Under the National Timber Industry Policy, which was launched in 2009 by MTIB, the sector is aiming to generate RM52bn ($16.77bn) in export earnings by 2020, primarily as a result of boosting the export of value-added products. In 2011 around 42% of total timber-related exports qualified as value-added products, according to MPIC figures. MTIB hopes to increase this number to 60% in the coming years. Achieving these goals will require the sector to boost production of raw materials, increase training activities and invest in new technologies.

COCOA: Cocoa production in Malaysia peaked in the late 1980s, when some 407,000 ha were dedicated to the crop. Since then, falling international cocoa prices and government incentives supporting other commodities (palm oil and rubber, in particular) have resulted in steadily declining cocoa production. By 2011 only 19,417 ha were dedicated to the crop, according to statistics from the MCB.

Despite declining production, in the past decade Malaysia is now one of the largest cocoa grinders in the Asia-Pacific region. In 2011 the sector produced 299,271 tonnes of ground beans, down slightly from an all-time high of 310,001 tonnes in 2007. With this in mind, the country has seen steadily increasing export incomes over the past decade, largely on the back of value-added products such as cocoa butter and cocoa powder. In 2011 the industry pulled in RM4.22bn ($1.36bn) in export revenues, which was an increase from RM4.19bn ($1.35bn) in 2010 and RM3.23bn ($1.04bn) in 2009.

Furthermore, in an effort to boost local production in the coming years, the MCB is working with smallholders (who make up 97% of the industry) to plant new varieties of high-yield cocoa and to make better use of new technologies. Eventually, the board plans to offer incentives with the goal of attracting investment from international partners. “We would like a multinational conglomerate to buy or lease a substantial piece of land to produce cocoa on a large scale,” said Lee Choon Hui, the director-general of the MCB. “With Malaysia’s existing grinding capacity, a local producer would have the chance to control the entire value chain.”

RICE: In 2011 Malaysians consumed around 2.7m tonnes of rice, up from 2m tonnes in 2000. Local production was stagnant over the same period, meeting between 70% and 80% of total consumption. In order to make up for this deficit, Malaysia has become one of the world’s largest rice importers, bringing in around 1m tonnes on an annual basis. Under the NAFP, the government is working to double the country’s rice yield from 4 tonnes per ha to 8 tonnes per ha by 2020. MARDI is in the process of developing a number of high-yield rice varieties in support of this goal. The rice segment is also expected to benefit from investments made as a result of three separate EPPs under the ETP.

FRUITS & VEGETABLES: The majority of fruits and vegetables grown in Malaysia are sold for domestic consumption. The segment posted export revenues of RM1.4bn ($45m) in 2011, according to MIDA, while imports the same year came to RM4.3bn ($1.38bn). Malaysia mostly exports tropical fruits, including pineapples, bananas and durians, while imports consist primarily of temperate fruits, including apples and oranges. Under the ETP, the government plans to invest RM1.4bn ($45m) in the fruits and vegetable segment, with the goal of creating 9075 jobs and boosting GNI contribution to RM1.5bn ($48m) by 2020. In particular, the state is working to expand the organic segment, which commands much higher prices than the non-organic segment.

FISHERIES: The fisheries segment is quickly expanding. According to the Department of Fisheries, it produced 2.01m tonnes of fish and related products, including a variety of seaweeds in 2010, with a total value of around RM9.5bn ($3.06bn). A substantial percentage of total production was sold locally. Fish exports brought in RM2.6bn ($83m) in 2010, according to MIDA. Around 75% of total production can be attributed to marine and inland capture fisheries, while a rapidly expanding aquaculture segment accounts for the remaining 25%. Malaysia’s fisheries sector is expected to benefit substantially from new investments under the ETP.

OTHER PRODUCTS: Other agricultural segments include tobacco, kenaf, pepper and sugar. Tobacco and kenaf, both of which are grown primarily for export, have benefitted from substantial amounts of public investment since April 2010, when the government created the National Kenaf and Tobacco Board to boost activity in the segment. Similarly, the pepper and sugar segments have seen additional investment in recent years, as the state works to build on existing strategic advantages. According to MIDA, Malaysia is the sixth-largest pepper producer in the world, and accounts for around 8% of total global production. Meanwhile, Malaysia’s sugar industry remains quite small – local suppliers meet only 1-2% of national demand – and heavily subsidised, despite rising consumption rates. With this in mind, the industry is expected to grow substantially in the coming years. “Sugar consumption in Malaysia has been increasing steadily over the past 20 years, growing at a compound annual growth rate of 4.1%,” said Chua Say Sin, the CEO of MSM Malaysia Holdings, which is owned by Felda and is responsible for around 57% of the country’s sugar production. “It is forecast that by 2015, Malaysia will produce 2m tonnes of refined sugar per annum.”

OUTLOOK: The sector faces many challenges. Ongoing structural issues in Europe point to declining external demand for agricultural and industrial products in 2012 and 2013. Other challenges include the widespread underutilisation of technology among most smallholders, which make up a substantial percentage of the workforce (see analysis), and recent changes to Indonesian tax law, which threatens to undermine Malaysia’s thriving palm oil segment.

Despite these issues, agricultural production and receipts are set to grow in the coming years, largely as a result of several ongoing programmes. According to forecasts by the Malaysian Institute of Economic Research, a local non-governmental organisation, the country’s overall GDP will grow by 4.2% in 2012, down slightly from 5.1% in 2011 and 7.2% in 2010, with expansion expected to be fuelled primarily by rapidly rising domestic demand. The state is working to increase private sector participation in all agricultural segments to ensure food stability at home and maximise export incomes abroad. These efforts should have a positive impact on agricultural production.