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.