Sustainable palm oil production is in Malaysia’s hand

With Russia’s invasion of Ukraine constricting the global supply of edible oils, demand for palm oil has spiked. But as the war continues, supply remains uncertain. Indonesia’s export ban on crude palm oil, palm kernel oil and cooking oils added further strain.

Indonesia’s export ban was initiated in April 2022 to bring down persistently high domestic prices that have been on an upward trajectory since mid-November 2021. Although Indonesia lifted the export ban on 23 May 2022, exporters and traders are awaiting clarity from the government concerning exporting rules. Malaysia aims to take advantage of the global edible oil shortage and regain its market share of palm oil. It is considering lowering its 8 per cent export tax on palm oil to boost exports.

But the broader impacts of rising inflation on palm oil production costs must be better considered — particularly their disproportionate effect on smallholders who produce 40 per cent of Malaysia’s palm oil output.

While increasing palm oil exports may provide higher revenue for producers, the cost of fertilisers and agrochemicals has increased in Malaysia, exacerbated by the global shortage of fertilisers caused by Western sanctions on Russia. Though global palm oil prices are expected to ease from their record highs with Indonesia’s export ban lifted, the costs of fertilisers and agrochemicals is likely to remain high, particularly as the Russia–Ukraine conflict continues. This makes easing cost woes for smallholders a policy priority.

Another concern is that Malaysia lacks the infrastructure to retain any market share it gains in the short term. Across Peninsular Malaysia, land for palm oil expansion is limited in availability as most areas have already been planted and urban development is prioritised. Sarawak and Sabah are still growing their plantations at around 1.58 million hectares and 1.54 million hectares respectively. However, the only Malaysian state rapidly expanding palm oil plantation areas is Sarawak.

Given Malaysia’s heavy reliance on manual labour for palm oil palproduction, the ongoing labour shortages following two years of Covid-19 lockdowns will hinder Malaysia from capitalising on newfound market opportunities, let alone sustaining output.

Malaysia simply cannot compete with the volume of Indonesia’s palm oil production. Indonesia accounts for 56 per cent of global palm oil production, while Malaysia’s relative lack of available land and manpower means it accounts for 31 per cent. So, Kuala Lumpur is unlikely to transform its interim market share into long-term gains.

Malaysia’s only competitive edge over Indonesia is based on its progressing efforts to support sustainable palm oil production. Sustainability commitments are important because widely reported deforestation, forced labour and land grabbing issues pose a reputational risk to the palm oil sector.

eastasiaforum