If this were 2011 and you were an oil palm grower, you’d be thinking about expanding your acreage, believing you struck gold with crude palm oil (CPO) prices soaring to RM4,000 per tonne.
Alas, if only this were true today.
CPO prices have plummeted 27.8% from RM2,486 per tonne at the start of 2018 to RM1,794 in December, according to Malaysian Palm Oil Board (MPOB) data. It is now hovering around RM2,000 per tonne. The drop has had everyone, from major palm oil players to independent smallholders, reeling with anxiety as many have seen their margins decimated since last year.
Take one of the largest companies on Bursa Malaysia, Sime Darby Plantation Bhd, as an example. For the three months to Sept 30, 2018, the group reported RM115 mil in net profit, a 57% drop year-on-year, with revenue slipping 14% to RM3.04 bil. Lower average CPO prices realised for the quarter as well as lower average palm kernel prices, according to Sime Darby, were among the reasons for the weaker performance.
Local media reports have also been documenting the plight of smallholders who are claiming tough times after not being able to sell their fresh fruit bunches due to a glut and falling prices. To top it off, an aggressive anti-palm oil movement in Europe is afoot where biofuels will be phased out by 2030.
Indeed, it has been a horrid 2018 for the world’s most-used edible oil. But in the centre of this testy commodities storm is Primary Industries Minister Teresa Kok Suh Sim, who is ushering in 2019 with a clapback to the potent mix of drivers which saw CPO prices spiralling downward.
“When Pakatan Harapan (PH) took over the government, and when I became minister, there had been a lot of revamp on the political side of things such as rebuilding institutions and clamping down on corruption. But we were also hit by the global economic downturn and commodity prices are also declining.
“So being the minister in charge of commodities, I’m facing a lot of pressure trying to learn about commodities while attempting to resolve problems in the sector, and to top it off, we are hit by low CPO prices. Of course, this puts me in a very unfavourable situation,” she tells FocusM.
The primary industries ministry draws up policies for commodities and oversees a few agencies, including MPOB. The focus has always been on two of the country’s most traded agricultural products: palm oil and rubber. It’s the former that has been making headlines recently not only because it is the most important contributor to the gross domestic product (GDP) of the agricultural sector at 46.6%, but also its political and national heritage.
So, how will Kok push for a turnaround? Among some of the initiatives she has in mind are revamping the MPOB, waiving the windfall tax, introducing a possible increase to cess contributions, and encouraging local consumption of palm oil. (See Q&A on P.10)
Steep learning curve
Kok clocked in to work on July 2 when CPO prices were hovering at RM2,551 per tonne. She was selected by Prime Minister Tun Dr Mahathir Mohamad to lead the commodities portfolio after PH defeated Barisan Nasional (BN) in the May 9 general election last year, where Malaysia saw a power switch for the first time in its history.
“I had never thought of coming into this portfolio,” Kok says. “You’ve heard me openly say that I wanted to play a role to revive the economy, but I never thought of this ministry.” Indeed, prior to her appointment, speculation was rife that Kok would either lead the Federal Territories Ministry, as she has been Seputeh MP, a constituency in Kuala Lumpur, since 1999, or helm the Tourism Ministry. She has also been a Selangor state exco for the investment, trade and industry portfolio from 2008 to 2013.
“But somehow I have been appointed to this role and I am happy,” she adds. The Primary Industries Ministry has demanded much from Kok and she concedes that this is “something new” for her. “But I’m learning,” she adds.
But is time on Kok’s side? “Those days, I’ve been fighting against corruption and undemocratic practices. But, now, I’m fighting against injustice and discrimination against palm oil,” she says. Framing her challenges under the banner of injustice and discrimination may seem to be putting the fight in strong terms but those might aptly describe her challenges for 2019.
The battle for CPO is fought on many fronts. Internationally, the lobbying is intense in Europe, where the EU is Malaysia’s third biggest palm oil customer, and much of its imports are used to make biofuels. Some countries are not waiting for the biofuels ban to take effect in 2020.
Just weeks ago, Kok issued statements to France and Norway over their decision to limit the use of palm oil in certain sectors. The French National Assembly recently voted to exclude the use of palm oil as a biodiesel feedstock. The Norwegian Parliament, on the other hand, voted to limit and phase out palm oil beginning 2020, making it the first country in the world to ban biofuels based on palm oil.
Such concerted efforts by Europe even drew the ire of Mahathir. “On the matter of free trade... they start labelling Malaysian palm oil. This is not part of free trade,” he told reporters on the sidelines of the Asean Summit on Nov 15. Such labelling in certain countries would not allow a complete implementation of free trade, he argued.
But, according to Kok, what makes the EU lobby particularly difficult is that the move does not stem from politicians, but the people. “If you look at the consumer surveys done by certain companies that buy our palm oil, they will tell you there’s a surge of anti-palm oil sentiment among the consumers in Europe where they are demanding no palm oil in their products,” she says. “It’s the Europeans themselves, the people, who are against palm oil.”
So Kok and her ministry have decided to change tack in their countermeasures. The old methods of relying on MPOB to fight against such campaigns or to lobby in Europe will not work, she notes. “When the whole population, not the politicians, are against you, you need to take the battle seriously.”
The answers to these problems are found on Malaysian soil, she observes, “where Malaysians themselves should go against the anti-palm oil sentiment by supporting the government’s push for palm oil products or consume such products themselves.”
100% MSPO certification
Naturally, this means a slew of programmes and reforms in the fight against that perception. But as it is, local players are up against a mountain of a challenge. Research houses such as MIDF have raised the problem of cost structures that might drag earnings for local planters through 2019.
The existing CPO cost structures of local players may cut competitiveness in the global market against Indonesia producers as well as other oil industries, primarily soybean, said MIDF in its 2019 Outlook report. Some of these structures include: the MPOB cess of RM11 per metric tonne (MT) for CPO and crude palm kernel oil (CPKO), MPOB price stabilisation tax of RM2 per MT for CPO and CPKO and windfall profit levy of 15% and 7% should CPO prices breach RM2,500 and RM3,000 in the peninsula, and Sabah and Sarawak, respectively.
“Coupled with the cost needed to fulfil RSPO and MPSO requirements, the cost structure borne by local CPO producers may lead to sustainability issues,” MIDF said, referring to the Roundtable on Sustainable Palm Oil and Malaysian Sustainable Palm Oil, respectively.
Because the industry is highly regulated, notes Kok, this year will be dedicated to ensure every smallholder is MSPO certified. This certification, she believes, will be the buffer against the anti-palm oil push, especially in Europe. “That is why we are pushing for this even harder,”she says.
The thrust to achieve 100% MSPO certification for smallholders was set out by Kok’s predecessor Datuk Seri Mah Siew Keong. Initially the certification scheme was implemented on a voluntary basis since 2015 but beginning May 2017, the government agreed to mandate all growers and processing facilities obtain MSPO certification by December 2019. That deadline remains despite the change at the ministry’s helm,
“A lot of people question whether I can achieve 100% certification or not. Whether we can achieve it or not. Well, if we don’t put a timeline and a deadline, no one will take you seriously. This is a government initiative to set a standard for palm oil,” says Kok. “And this covers the whole value chain. It fosters good agricultural practices and also establishes a traceability system, among others.”
According to an MPOB spokesman, there is an RM80 mil war chest for the agency to use in ensuring this goal is met, including the RM30 mil allocated this year under Budget 2019. The allocation would reach both organised and independent smallholders. The former are part of an agency such as Felda.
The allocation will be used to cover all the procedures needed for a smallholder to be MSPO certified, from training to the setting up of chemical storage units. MPOB will bear the cost for independent smallholders at RM135/ha while organised smallholders will only receive some of the money, solely for auditing and training, but priced at RM10/ha.
On top of these are one-off incentives for mills and estates. Mills can claim 30% of auditing fees. So, for example, if Phase 1 and 2 audits cost RM30,000, then 30% of that amount is claimable. Estates, on the other hand, are entitled to either 70% of auditing fee for those below 1,000ha. Those above 1,000ha get 30%.
The drive to get smallholders MSPO approved has drawn praise from certification body RSPO which sees government-driven standards such as MSPO as a catalyst for smallholders to pursue RSPO certification.
“As MSPO certification will be a mandatory compliance for all Malaysian oil palm growers by the end of 2019, we don’t feel there’s any additional policy that could realistically be implemented by FY19,” says RSPO chief executive officer Datuk Darell Webber.
Engaging smallholders and assisting them with education and implementation of sustainable practices is the way forward, he notes, as these will enable them to adhere to the core aspects of certification.
“The barriers and realities for oil palm smallholders to achieve certification are now well documented. Our collective effort and focus should be on simplifying these barriers, enabling smallholders to produce more sustainable oil, using less land and have access to new markets, which in turn will raise their income and reduce the risk of land conversion that threatens forests and biodiversity,” adds Webber.
Certainly, such a thrust has been received with mixed reactions, says Kok. “Because when palm oil prices are low, and you want the smallholders to go for certification, they will ask you, even state assemblymen have asked me, ‘If we sell our palm oil to China, we don’t need certification.’ Yes, now you don’t need certification, but you don’t know about two, five or even 10 years down the road.’
Her reasoning is that by displaying a commitment to be certified, the government in turn is showing that it means business. “And the government pays for the smallholders to be certified,” she adds.
Early on in the job, Kok also made it a point to state that Malaysia is committed to having more than 50% of forest cover to allay concerns of deforestation activists such as Greenpeace.
“We have to keep that promise,” she says. Kok courted controversy when during the early days of her tenure, she called for a halt on acreage expansion. “When I first came up with that statement, I was criticised,” she says. “Simply because I was new in the industry. Of course, big plantations which had been raking in huge profits do not like to hear this. But when prices started declining, some of them started to agree with me that we shouldn’t expand our oil palm plantations, but the focus should be on yield.”
Two of Malaysia’s largest states, Sabah and Sarawak, have also resolved not to open up more land for oil palm cultivation. But there is more. “I am going to push for all the other states to come up with this commitment and I hope they honor their word,” Kok adds. If Malaysia heads in this direction, she reckons, it would be able to show that it is committed to ethical practices.
As for market movements, Kok is confident that commodity prices move in cyclical fashion and will go back up at a certain point in time, “because the price is already at its lowest. So, it can only go up and cannot go down further,” she notes.
Kok’s analysis might come true. India has slashed import duties on crude and refined palm oil sourced from Southeast Asia, effective Jan 1 this year. This would benefit Malaysian players such as Sime Darby and FGV Holdings Bhd.
Also, CPO duties for Asean countries will be cut to 40% from 44%, while refined palm oil duties will be reduced from 54% to 45% for Malaysian production and 50% for other Asean countries.
But that’s assuming smallholders understand market fluctuations. Given how political palm oil is, with the previous BN administration relying on smallholders. especially Felda settlers, to drive votes, Kok will have to work through the calls asking her to resign, a charge led by Umno, due to the low market prices.
“I’ll just have to brush them aside. What else can I do? When smallholders, one by one, say I should go and visit and that I should boost prices… Sure, I’ll go down to the ground. But I am not going to give you money, neither am I going to resolve your immediate problems. We can only talk about the future and that is what the government should do,” she says.FocusM