No respite for palm oil players despite high CPO price

This article first appeared in The Edge Malaysia Weekly, on March 15, 2021 - March 21, 2021.
No respite for palm oil players despite high CPO price
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CRUDE palm oil (CPO) futures may have reached their highest level in 13 years of RM4,122 per tonne last Wednesday, but for Malaysian palm oil players, there is not much to rejoice about as the industry finds itself in a predicament.

Last Monday, 12 associations representing stakeholders of the Malaysian palm oil supply chain issued a joint statement to appeal to the government for resolutions on the three issues of severe labour shortages, current high taxes imposed on growers, and problems with market access.

A stakeholder of the group explains that the “current trend of unabated cost increases and regulatory impediments amid an outdated taxation structure of the Malaysian oil palm industry” has weighed heavily on players and threatens the competitiveness and sustainability of the industry.

“If these are not addressed, don’t expect anyone to make new investments, reinvestments, or, for that matter, be interested to buy plantation shares. For those entrusted to govern, please don’t kill the only goose that lays the golden egg in the agricultural business. Failing which, Malaysia may no longer be able to retain her position as the world’s second largest palm oil producer,” says the stakeholder.

Since the Covid-19 pandemic hit last year, leading to the freeze on the recruitment of foreign workers, the Malaysian oil palm industry has been facing an acute shortage of labour.

In its first appeal, the group urges the government to allow guest workers who are currently in their respective countries of origin to return to Malaysia to work. This, they say, is to reduce further opportunity loss for the industry in the upcoming peak production season and to capture the current high palm oil prices.

According to the associations, what is not harvested translates into a potential loss in production of 3.4 million tonnes of CPO, or 18% of 2020’s total CPO output, and 0.86 million tonnes in palm kernel oil (PKO) per annum. This is tantamount to an opportunity loss of RM11.8 billion in revenue and RM4.37 billion in profit a year, based on the average CPO price of RM3,000 per tonne.

In addition, state and federal governments stand to lose on higher tax collection from the higher output through the various taxes on palm oil.

In the second appeal, the associations seek the government’s engagement with the industry to review the existing taxation structure imposed on planters, which ranges from the windfall profit levy (WPL) and the Malaysian Palm Oil Board (MPOB) cess to state sales tax in Sarawak and Sabah.

The industry seeks, first, abolishment of the WPL or a review of it; second, not to be burdened by future increases in cess — namely, after the recent increase of RM2 per tonne to RM16 per tonne for CPO and PKO; and third, for a review and lowering of the price thresholds or sales tax of 7.5% on CPO sales in Sabah (when the CPO price exceeds RM1,000 per tonne), and sales tax on CPO and PKO of 5% in Sarawak (when the CPO price is above RM1,500 per tonne).

The third appeal is for the government to expedite and invest more resources to address sustained and increasing anti-palm oil campaigns, discriminatory trade barriers, and unrealistic expectations and compliance requirements as well as ever-changing sustainability goals and practices.

“The significance of this is that it is the first time the palm oil industry fraternity is coming together in one voice to make an appeal to the government. This could also signify concerns over the industry’s well-being if the challenges faced are not addressed amid the view that the current upturn in CPO price could be a cure-all for the industry,” say CGS-CIMB Research head Ivy Ng and analyst Nagulan Ravi in a report.

Labour shortage resolution a priority

Of the three appeals, the view of experts is that the foreign worker shortage has the highest chance of being remedied by allowing them to return, but with strict standard operating procedures (SOPs).

Palm oil industry expert M R Chandran tells The Edge that the labour shortage has resulted in wastage of at least 15% to 20% of crops because they are not harvestable. In addition, delays in harvesting also impact the quality of CPO extracted.

Currently, the sector faces a labour shortage of close to 50,000 workers. Of that total, 32,000 are required for harvesting operations, while the remaining 18,000 are needed for general estate works, Chandran explains.

“We sorely need to address our stagnating national average productivity levels to improve our CPO yields per unit area. Last year, it was only just 3.3 tonnes per ha [compared with 4.01 tonnes per ha in 2011],” he says.

Attempts to hire locals to work in oil palm plantations have not been successful. CGS-CIMB’s Ng tells The Edge adds that planters have made efforts to do so, placing advertisements and carrying out on-the-ground recruitment drives. However, many fail to show up at the interviews. Those who do often quit within weeks — a sign of adjustment issues as locals continue to shun jobs in what is perceived as a “4D” — dirty, dangerous, difficult and demeaning — sector.

Oil palm growers are not alone in appealing for a solution on the issue of foreign workers as other sectors affected are also asking for help, she adds.

“Palm oil players are justified in their appeal as their opportunity cost is high, especially when the CPO price is significant. This is a loss to the industry, and to the government’s revenue and coffers too. If the government and planters can work things out, everyone wins,” she says.

Relief from cess and windfall profit levy may take time

The long-term solution to productivity however, is not in employing more workers, but to invest wisely in mechanisation and automation, such as in the advanced economies, where automation practices have made agriculture more profitable while simultaneously reducing the ecological footprint of farming, Chandran explains. This is where the money collected from the additional cess and the WPL should be channelled.

Currently, a WPL of 3% is imposed on CPO priced above RM2,500 per tonne in Peninsular Malaysia, and 1.5% on CPO priced above RM3,000 per tonne in Sabah and Sarawak.

It should be noted that the plantation sector is presently the only industry in the country subject to a WPL imposed by the Royal Malaysian Customs.

“The problem has always been that every time the CPO price goes up, taxes are levied, but when the price comes down, the tax is not reduced. This is tough on players in the medium term as cesses are always added costs, which affect the competitiveness of the industry. Don’t forget that palm oil businesses are competing globally and not just among Malaysians,” Ng says.

As for the MPOB cess collection, Chandran proposes that it would be timely to recalibrate the prevailing cess calculation. He explains that it would be far more judicious to base it on a scale basis of the average monthly price of CPO, rather than the current mechanism of a fixed rate based on CPO and PKO production.

“I strongly advocate the cess payment to be on a graduated scale and not on a fixed sum based on production. For example, you can have a minimum cess payment irrespective of CPO prices, let’s say, at the current RM16 per tonne at a maximum threshold price of RM3,000 per tonne, and for every RM100 increase in average CPO prices, there should be an additional contribution of 50 sen per tonne. For example, if CPO prices increase from RM3,000 to RM4,000 per tonne, the additional cess paid would be RM5, or a total of RM21 per tonne,” he says.

Chandran notes that this translates to an average 0.5% of prices, which is closer to the 1% to 1.5% range that goes to R&D for most advanced agricultural crops, such as soybeans.

“However, the R&D should be focused and the structure of MPOB should be revamped,” he adds. It is worth noting that the associations have requested for a restructuring of the body to make it more efficient “in keeping with MPOB’s original objectives and purpose”.

The Malaysian Estate Owners’ Association estimates that the WPL to be collected from the palm oil industry in 2021 will be around RM482 million should CPO trade at RM3,000 per tonne, and may go up to RM1.58 billion should the price increase to RM4,000 per tonne, while the cess collection is estimated at RM336 million.

“It is good that industry players have voiced their concerns as they need to know where they stand. The government needs some time to respond, and I trust it will. After all, I’ve not heard of major proposals being ignored by the government,” says Ng.


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