Last week, Boustead Holdings Bhd announced that it will be pulling out of the Indonesian oil palm scene due to tough operating conditions. Also, its low-yielding estates in Indonesia have been a drag on the group’s plantation division.  

Group managing director Tan Sri Lodin Wok Kamaruddin said Boustead is selling 17,000ha of land in Sumatra. Last year, it sold 22,500ha of oil palm estates in the country and made a RM30 million gain and RM8 million savings in financing costs.

Boustead’s decision followed moves by Kulim (M) Bhd and Tradewinds Bhd to exit the oil palm plantation business in Indonesia.
Kulim, which sold some 63,260ha of land in Kalimantan in 2007, stated that the returns on investment were not as good as for the estates it owns in Papua New Guinea, the Solomon Islands and Malaysia.

Are the prospects getting cloudier for these players or is it simply that plantation businesses in Indonesia have become increasingly challenging to operate?

A planter who has oil palm estates in Indonesia says it all boils down to having reliable local partners, the location and good estate management practices.

“These best practices are what planters adopt whether you are doing business in Indonesia or Malaysia. Having said that, however, there have been a number of thefts in the estates, ranging from smuggling fresh fruit bunches to selling tonnes of fertiliser to another party. This can hurt yields and productivity, which are some of the problems faced by Malaysian planters in Indonesia.”

That said, Indonesia still presents ample opportunities for oil palm cultivation, especially in the Kalimantan region where big players like United Plantations Bhd, Kuala Lumpur Kepong Bhd (KLK) , IOI Corp Bhd, Sime Darby Bhd and Singapore-listed Wilmar International Ltd own vast tracts of plantation land.

Indonesia still has large tracts of land available for agricultural activity, which would appeal to plantation players, an industry player says.

“Indonesia remains attractive as the climate is favourable for oil palm cultivation and labour costs are low. Additionally, having large contiguous tracts of land improve economies of scale,” says Datuk Alex Chen, Metro Kajang Holdings Bhd’s executive chairman.
KLK, in its 2008 annual report, stated that the key factors to expanding in Indonesia are choice location, terrain and soil and new planting and proper execution. Some 49.2% of its total landbank is in Indonesia, with most of it in Kalimantan.

Analysts also say limited agricultural land in Malaysia will spur local players to grow their landbank in Indonesia.
“You need to have a strong network of good Indonesian partners to ensure success for Malaysian planters. It also helps if you apply for the cultivation rights title (hak guna usaha or HGU). There are some players who have to wait up to two years just to get the land title,” a plantation player says.

The key land titles required include the freehold title, the right to use the title as well as HGU. Under Indonesian land law, HGU gives a holder the right to use state-owned land for the purpose of agriculture, particularly oil palm cultivation. A HGU is granted for 25 or 35 years and may be extended for another 25 years if the land is deemed well managed and properly utilised.
Indonesia overtook Malaysia as the world’s largest CPO producer at the end of 2006. Both control 90% of the world’s palm oil production.

CPO June contract on Bursa Malaysia Derivatives rose to RM2,185 last week, a level not seen since September last year on lower CPO production estimated for March. CPO closed at RM2,165 a tonne last Friday.

This article appeared in The Edge Malaysia, Issue 749, April 6-12, 2009.