Is the Surge in Malaysian Palm Oil Prices Coming to an End?

The Malaysian Palm Oil Council (MPOC) has indicated that a current mismatch in supply and demand is driving up the prices of palm oil. The following are the supply-side factors affecting this rise:

The government has frozen the recruitment quota because there exists an oversupply of foreign workers in the manufacturing and service sectors. Plantation and Commodities Minister Datuk Seri Johari Abdul Ghani noted, "The plantation industry is hesitant to employ (too many foreign workers) for fear that some of them might be forced, leading to potential allegations of forced labor." Presently, the palm oil industry still relies on foreign workers for approximately 75% of its workforce. The recent government freeze due to an oversupply of foreign workers in other sectors has thus constrained the industry's supply. Analysts estimate that labor shortages have resulted in losses of RM20 to RM30 billion for the Malaysian palm oil industry.

Palm trees reach their peak production between 9 and 18 years of age; after this period, yields start to decline, necessitating tree replacement. "About 4% to 5% of palm trees require replanting annually. Over many years, Malaysia's replanting rates have hovered around 1% to 2%," Bek-Nielsen revealed to S&P Global during an event. Analysts note that approximately 30% of Malaysia's palm trees are past their prime, and the nation's replanting rate falls short of the necessary line. Currently, the global crude palm oil yield averages 3.15 tons per hectare, approximately half of the industry's optimal yield of 6.1-6.3 tons per hectare.

The EU Deforestation Law involves three compliance-related restrictions: the provision of geographic location, proof of land ownership, and evidence that no deforestation occurred on the land after December 31, 2020. "For big plantations like us who are certified by RSPO, the new rules will not be much of a problem," Bek-Nielsen said. However, for small palm oil farmers, compliance with the EU Deforestation Law is challenging. "We are talking about 5 million palm oil smallholder farmers in Southeast Asia with millions of parcels of land. To cascade the message down the supply chain, upskill them, and help them understand what this is all about just isn't going to happen in the next 9 months. It's unrealistic," Bek-Nielson added.

Regular replanting is a particular issue for smallholders in Malaysia. Despite the government's longstanding incentives to encourage replanting of old trees, the actual implementation of these programs has been disappointing. "While large plantations can manage these additional costs, for smallholders, it's a vicious cycle—they have lower yields and therefore lower profitability. When your profitability is low, you can't afford the costs of replanting," Bek-Nielsen stated.

Bullish Sentiment Wanes: The MPOC points out that with ample global soybean supply in April and a seasonal recovery in palm oil production, the current bullish trend on the 4250 MYR level is less likely to materialize. "March's palm oil prices were at a premium of $40 to $95 over soft oils. However, as soft oil prices recover, this price difference is expected to narrow."

An analyst from Interband suggests that the lack of palm oil inventory in Malaysia and Indonesia will put pressure on prices, which are expected to fluctuate between 3700 MYR to 3900 MYR per ton. "Regarding inventory, both Malaysia and Indonesia are lacking in palm oil stock, which will create some pressure," he mentioned.

Analysts from Kenanga Research also predict a softening in palm oil prices after April, partly due to the impending South American soybean harvest and a not-so-high demand for palm oil.