Fall in palm oil prices may slow down replanting

Fall in palm oil prices may slow down replanting

KUALA LUMPUR (Dow Jones): The fall in palm oil prices in recent months is unlikely to lead to increased replanting in Malaysia because that would further dent the incomes of cash- strapped plantation companies, said W. Tissa Perera, chief executive of The Incorporated Society of Planters.

In an interview with Dow Jones Newswires, Perera said that large-scale replanting now, as advised by the Malaysian government, would aggravate company cash-flow problems caused by a steady decline in palm oil prices in recent months.

The Incorporated Society of Planters is an umbrella organization of planters, mostly in Asia.

Palm oil prices have been pressured by rising stock levels in Malaysia and a string of other negative news, such as higher import taxes in India, low demand from China and a plan by Indonesia to lower the export tax on crude palm oil and eliminate the tax on refined products.

Wednesday, the benchmark September CPO futures contract on the Commodity and Monetary Exchange of Malaysia, or Commex, closed at 998 ringgit ($1=3.8 riggit) a ton, down 8 percent from a month earlier. It was the first time the contract has closed below 1,000 ringgit/ton. It closed Friday at 1,028 ringgit/ton.

"Now that prices are so low, producers may not want to reduce their income further by cutting down old trees," Perera said.

"It may sound ironic. When prices were high, no body wanted to replant. Now when prices low, no body may want to replant either," Perera said.

When crude palm oil prices peaked during the Asian financial crisis, many put off routine replanting to take maximum advantage of the high prices, he said.

Companies postponed replanting to produce the maximum, despite the fact that many plantations had trees aged 20 years or more.

During the crisis, crude palm oil prices reached 2,500 ringgit/ton owing to the weakness of Asian currencies. The ringgit fell to around 4.5 ringgit to a dollar during the crisis, from about 2.5 ringgit just prior to it. As a result, local currency returns went up, although exporters obtained the same U.S. dollar-denominated prices abroad.

"But plantation companies are known to put their money in many baskets," Perera said, noting most plantation companies in Malaysia are also real estate developers and have invested in other businesses the money they made during the high prices. "And these sectors haven't recovered from the crisis yet."

It is estimated that about 30 percent of the oil palm in Malaysia is 20 years old or more. It needs to be replanted if the country is to raise yields and remain competitive.

The Malaysian government says replanting now is the best way to cut production and boost prices. Production in Malaysia rose 26 percent on the year to 10.55 million tons in 1999 and is expected to reach at least 11 million tons this year.

"Production this year will be definitely more than 11 million tons," Perera said, adding it could be around 11.5 million tons.

Rising output has lead to a glut in the market with Malaysian stocks above the one-million-ton mark since May.

The government is now pushing smallholders and plantation companies to replant, thereby lowering output in the short term.

"In order to bring about bullishness in the market, we have to go in for replanting in an aggressive way," Primary Industries Minister Lim Keng Yaik said recently.

Lim said if growers replanted at least 150,000 hectares of existing estates, it would automatically reduce output by about 450,000 tons a year until the new trees mature.

The government has asked the Malaysian Palm Oil Board to conduct a survey of estates and identify those with older trees. It has also set up a 80 ringgit million fund to provide low-cost financing to smallholders who opt to replant.

Perera, however, said the government needs to do more, such as finding new markets to boost prices. "A lot of producers have sold (oil) in the forward market. So the real impact of the current low prices will only be felt in the next few months," and then it will become a major problem with growers demanding a reduction or the removal of export taxes, he said. Malaysia currently levies a tax ranging up to 10 percent on the export of crude palm oil.

"One can't say how long the low prices will stay. Buyers have stopped buying. India was out of the market in the last two months. Indonesia wants hard currency, so they are exporting crude cheap," he said.