This article first appeared in The Edge Malaysia Weekly, on March 21 - 27, 2016.

WHILE oil palm is the world’s most efficient oilseed crop in terms of land usage, oil palm planters are essentially “price takers”, says Datuk Carl Bek-Nielsen, vice-chairman and chief executive director of United Plantations Bhd (UP).

Having little control over pricing, the best way for planters to keep costs at bay is to raise productivity and yields. And for maximum yields, there needs to be “good planting material, a disciplined management, adequate labour and good weather”.

“Increasing productivity and yields are the No 1 factor that all planters should focus on,” Bek-Nielsen said during a panel discussion on the challenges and opportunities for the sector at the recent Palm Oil Conference in Kuala Lumpur.

“The industry has failed to carry out adequate replanting for years … Too many plantations have reached declining productivity,”  said the 43-year-old Bek-Nielsen, who was born in Petaling Jaya. He was referring to estates with trees near and over the age of 25 that need to be replaced.

According to him, planters need to “speed up replanting by 8% to 10% per year” to catch up, or industry-wide production could decline significantly in the coming years.

“You need RM12,000 to RM14,000 per hectare to do a good replanting and bring the palms to maturity. For Malaysia, I would peg the necessary replanting area per year at a minimum of 270,000ha, and preferably 400,000ha, if we are to address the issue of stagnating yields,” Bek-Nielsen tells The Edge in response to questions via email.

That works out to investments of at least RM3.24 billion to RM3.78 billion a year, or RM4.8 billion to RM5.6 billion a year if 400,000ha were being replanted. Ideally, the number of trees being replaced should coincide with the number of young trees going into production.

It was estimated that 26% of Malaysia’s oil palm trees were at least 20 to 28 years old, and only 9% were below nine years old, according to a December 2012 paper by the United States Department of Agriculture on stagnating growth rates of palm oil yields in the country. It attributed the stagnation to a mix of “adverse weather, restrictive labour and immigration policies, ageing trees and plant disease”.

Bek-Nielsen’s assessment of industry-wide replanting needs implies the need to replant at least 5.9% to 8.7% of estates a year in the next few years. This is taking into account that Malaysia had 4.59 million hectares of planted area spanning 4,688 estates in 2014, of which 3.9 million hectares were being harvested, according to data from the Department of Statistics. Yield per hectare stood at 18.63 tonnes of fresh fruit bunches (FFB), with 72.71 million tonnes produced in 2014.

Oil palms generally start producing around the third and fourth year and produce the most fruit between 9 and 18 years old. Productivity gradually declines thereafter and trees should be replaced by year 25, although they have a 30-year lifespan.

According to Bek-Nielsen, Malaysia has good seed producers for trees that can yield six to seven tonnes of crude palm oil (CPO) or 28 to 32 tonnes of FFB per hectare per year. The current industry average is about four tonnes of CPO and 18 to 20 tonnes of FFB.

“Our average yield in 2015 was 5.3 tonnes of CPO per hectare, or only 35% to 40% above the national average”, he says, adding that he “foresees improvements” in terms of yield at UP estates going forward.

A total of 17,309ha of UP’s Malaysian estates or 48.6% of its total oil palm area (UP also plants coconuts and has around 20% of its estates in Indonesia) has been replanted in the past seven years (2009 to 2015). In 2015, 2,715ha were replanted. Including Indonesia, UP’s total area planted with oil palm has almost doubled over the past 14 years to 45,095ha, with 16.1% immature trees (20.5% in Malaysia alone).

“This [the group’s replanting programme that will be completed by 2018] is absolutely necessary if we are to further improve on the age profile of our established plantations and with that our average yields, which is of special importance in maintaining our favourable cost base,” UP chairman Tan Sri Johari Mat said in the company’s 2015 annual report.

The Bek-Nielsen family controls 48% of the 110-year-old UP.

“We’re trying our best to remain focused on our core business, which is to raise yields through good yielding materials produced in-house at our research centre, United Plantations Research Department, coupling this with good and disciplined management and proven agricultural practices,” Bek-Nielsen adds.

While good weather is important to attain the desired yields from oil palm, the biggest headache for planters is labour.

The current bullish prognosis for CPO prices, on the back of a forecast dry weather-induced production drop this year, is being doused by expectations of higher labour costs and foreign workers levy.

“The new levy rate could crimp our earnings forecasts for Malaysian planters under coverage by 1% to 8% for FY2016 (assuming a full-year impact), CIMB Research regional plantations analyst Ivy Ng wrote in a Feb 1 note after the government announced a surprise foreign worker levy hike across several industries. The levy in the plantation sector will rise 154% from RM590 to RM1,500 per worker. But the implementation has been put on hold following an outcry by employers, with a dialogue still pending at the time of writing.

According to Ng, the palm oil industry is “heavily dependent on foreign workers, who make up 78% of total workers”.

Although the government’s intent may well be to encourage automation and cut over-reliance on cheap labour, oil palm planters say mechanisation is easier said than done.

“The dilemma with oil palm is that it is a labour-intensive crop and does not lend itself so easily to mechanisation. If so, well, show it to the growers. The fact remains that oil palm is architecturally not inclined to mechanisation. But there is, of course, room to do much more and we should intensify our pursuit. It is not as though the industry has stood still,” says Bek-Nielsen. “Immense amounts of resources” from the private sector and the Malaysian Palm Oil Board have been spent on mechanisation the past decade, he adds.

He notes that 20 years ago, the land-to-labour ratio was one worker to four to five hectares. Now, it is one to eight to nine hectares.

“So, there has been progress but it has not been fast enough. In this context, we must appreciate that this is not because efforts have not been made, but possibly that the efforts have not provided the desired solutions,” he says.

“Labour costs are escalating, and I can tell you very frankly that any progressive plantation group would be happy to use pragmatic solutions to reach a land-to-labour ratio of one worker to 15ha. But this is simply utopia now, unless you wish to see semi-jungle and poorly kept plantations with vastly higher losses. People must appreciate this fact,” Bek-Nielsen says.

Government statistics show that the number of paid employees in the oil palm sector fell to about 450,000 in 2014, from 510,000 in 2007, even as planted area rose from 3.8 million hectares to 4.6 million hectares and harvested area grew from 3.3 million hectares to 3.9 million hectares.  harvested FFB, meanwhile, went from 63 million tonnes to 73 million.

According to Bek-Nielsen, the industry needs a strategy. To do this, the country has to combine the best heads in the plantation sector with the best available resources from agriculturally astute companies abroad that have a proven track record in solving problems in the sector.

According to Johari, labour costs have risen 55% from 2010 to 2015 for all harvesters and general field employees in Malaysia. “Indeed, wages rose an additional 8.3% from 2014 to 2015 in Malaysia and 12% during the same period in Indonesia,” his 2015 annual report message read.

Whether higher labour costs would force planters to cut back on fertiliser or workers’ benefits, or even replanting programmes, Bek-Nielsen says it is a choice plantations will have to make. “But it would not be wise to cut back unless you want to see lower yields down the line.”

UP’s intention is to stay on course, Bek-Nielsen says: “We will not cut back as this is short-termism that gets you nowhere. We must continue to focus on the No 1 important resource — our employees and guest workers from foreign shores who help keep this important industry going.”

That the industry continues to thrive is in Malaysia’s best interests, not only because of its contribution to the economy, but also the importance of palm oil as a global food source. 

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