Old trees and ageing farmers worsen outlook for top palm oil exporters

Reuters

20 hours ago

PONTIAN, Malaysia, Aug 4 (Reuters) - Malaysian farmer Suratmen Mosman faces a dilemma that threatens to sap supply from the world's top palm oil exporters and drive up prices of the vegetable oil essential to billions of consumers worldwide in the next five years.
The ageing trees on his plantation 300 km (185 miles) south of Kuala Lumpur are bearing less fruit, but the 85-year-old is holding off replacing them as he doesn't want to lose income while waiting the three to five years it takes for new trees to start yielding a crop and the years beyond that it will take for them to reach peak production. Government subsidies to encourage replanting are not as high as they once were and he needs to support his family.
Used mostly as a cooking oil, but also to make cakes, cosmetics and cleaning products, palm oil makes up more than half of the world's vegetable oil supply and 85% of the crude product comes from Malaysia and Indonesia.
But after decades of soaring output, the market is now at a tipping point as combined exports from the two producers are set to slow sharply, the result of stagnating production and efforts by Indonesia to divert more palm oil into the production of biodiesel.
While financial markets have factored in the slowdown, there is growing evidence that plantations run by smallholders like Suratmen may be in worse condition than previously thought as ageing and lower-yielding trees are not replaced, which will add to the decline. Smallholders make up 40% of the plantations across Malaysia and Indonesia, so they play a vital role in the supply chain.
Supplies to global markets from Indonesia and Malaysia could fall as much as 20% over the next five years, according to Reuters' calculations based on government and industry projections, some previously unpublished.
Future output from smallholders may well be over-estimated because the condition of trees and the rate of planting new trees is worse than estimates by the governments in Kuala Lumpur and Jakarta, according to veteran industry figures Dorab Mistry and M.R. Chandran.
That view is backed up by Reuters interviews with more than a dozen farmers and officials in Malaysia.
And other previously unpublished data shows the acreage of plantations where trees are older than 20 years - a point at which they are considered beyond their peak - is growing fast.
Mistry, a director of Indian consumer goods firm Godrej International and a long-term palm oil analyst who has been in the industry for more than 40 years, and Chandran, the former head of the Malaysian Palm Oil Association, estimated that more than half of the trees on Malaysian smallholder plantations are well past peak production.
The estimate is significantly higher than Malaysian government data, which shows 37% of smallholder plantations are past their peak yielding phase.
"Palm oil supplies are getting tighter," said Mistry, who bases his estimate on site visits to plantations, data analysis, and engagement with producers, traders, and other key industry players.
"This is not just a problem in Malaysia but also in Indonesia. Though Indonesia's industry is younger, it will face the same problems in the next five years," he said.
In Indonesia, just 10% of a 2016 government target to replant 2.5 million hectares (9,653 square miles) by 2025 had been met as of last October, publicly available government data showed.
As a result, over one-third of oil palms among both smallholders and industrial plantations are either at or past their most productive years. Acreage for trees older than 21 years is set to rise 11% next year in Indonesia, according to previously unreleased data from state research firm Riset Perkebunan Nusantara (RPN).
Reluctance in Malaysia and Indonesia to replace old trees, plus Indonesia's increased biodiesel mandates, point to a sharp drop in palm oil exports in the coming five years.
Calculations based on Malaysian and Indonesia palm oil body estimates suggest combined exports are likely to drop to about 37 million metric tons by 2030, down by a fifth since 2024.
Indonesia is likely to have around 20 million tons available for export, down by nearly a third from last year, according to forecasts from RPN and the Indonesia Palm Oil Association (GAPKI).
There are no official forecasts for Malaysian palm exports by 2030, but Mistry said expectations are now that they will remain steady or decline slightly, reflecting a lack of consistent replanting and in contrast to earlier estimates of modest annual increases.
Indonesia's Ministry of Agriculture did not respond to requests for comment on the estimates for output and exports to drop.
State-run industry regulator the Malaysian Palm Oil Board said it did not agree with the assessment that over 50% of smallholders' oil palm trees are beyond peak yielding age.
"According to MPOB's 2024 data, only 36.2% of smallholders' oil palm trees are over 18 years old, and many smallholders have already begun replanting with government support," the board said in a response to questions from Reuters.
To ease replanting costs, the government offers a 50% grant and 50% loan, it added.
"The government values smallholders' contributions and continues to refine support schemes based on ongoing feedback to ensure long-term sustainability and inclusivity," it said.
Industry projections indicate global demand will rise by 50 million tons by 2050, requiring minimum annual supply growth of 2%, Chandran said. However, he estimates production is on track to grow at just 1.5% annually, he said, based on ageing trees and slow replanting rates in both countries.
The contrast to palm's earlier growth is stark. Palm doubled its share of the global vegetable oils market to 30.6% in the three decades to 1995, with Indonesian production growing an annual 8.1% and Malaysian output rising 3% over the same period.
"There will be growing tensions between rising global demand and the challenge of expanding production sustainably," said Chandran, who is also chairman of IRGA, an agritech firm specialising in data analysis and field research.
Already, strained palm oil supplies are pushing up costs for alternatives including soybean, rapeseed and sunflower oil.
Last year, crude palm oil traded at a $39/ton premium to soybean oil compared to a $160 discount in 2023, according to the Malaysian Palm Oil Board.
Top buyer India's annual palm oil imports are set to drop below other edible oils for the first time this year as rising palm costs push refiners toward alternatives.
Interviews with 11 small-scale Malaysian farmers found most were reluctant to replant as mature trees are their main income source amid two-year high prices.
"I did not replant my trees as I do not have any other sources of income," Suratmen said, standing among his five acres of oil palms in Johor state's Pontian district.
Some of his newer trees were planted on unstable peatland and lean at angles.
"My replanting efforts are limited to replacing fallen trees or planting new ones in between existing trees," he said.
Most smallholders converted rubber plantations to palm in the early 1990s and 2000s, so their trees have now reached the 25-year mark and are due for replanting, said National Association of Smallholders Malaysia president Adzmi Hassan.
The challenge is compounded by mostly ageing landowners, many of whose children have moved to cities, leaving planters without the labour or physical capacity to replant.
"You have to consider the plantation cost, the work to replant, and there are many independent smallholders who do not want to be tied down to a bank debt," said Mohd Sharul Haizam Shafei, 42, who owns 50 acres of plantation in Banting.
In Malaysia, the replanting rate averaged about 2% over the past five years, half the government's 4% target, according to Malaysian Palm Oil Board data.
While the Malaysian government provides a grant for half of replanting expenses, many smallholders are unwilling to take on debt to cover the rest, said Adzmi from the smallholders' association.
He is lobbying the government to fully subsidise replanting, as it did before 2019, but that is seen as unlikely as the government is cutting subsidies elsewhere, including for fuel.
Indonesia last year doubled replanting funding for smallholders, but Gulat Manurung, chairman of planters' group APKASINDO, said farmers struggle to access the funds due to land legality issues and complicated terms.
With ageing trees, fresh fruit bunch yields for smallholders in Indonesia last year averaged 9.6 tons per hectare, Indonesia Palm Oil Board data showed, less than half the yields produced at larger state-owned and private plantations.
The industry is in a bind to boost output as Malaysia caps total planted area while Indonesia, under pressure from the European Union and environmental groups, has a moratorium on new forest clearing for palm plantations.
Suratmen, the farmer in Pontian, said without a full subsidy, he's not replanting.
"Waiting for new trees to mature and produce fruit takes too long. We cannot support our families during those years without income from the trees," he said.