Across swaths of Southeast Asia, maturing palm oil trees, some as tall as a 12-story building, are turning into a multibillion-dollar headache for local farmers, regional governments and consumers everywhere.
As oil palms approach their commercial life span of a quarter-century, they provide less of the versatile edible oil, used in everything from ice cream to cosmetics and fuel. Some plants become too ungainly to tackle for laborers, who rely on handheld sickles attached to long poles. New palms, however, take several years to yield fruit in commercial quantities.
In palm-producing regions of Malaysia and Indonesia, where the pandemic led to a critical shortage of the manual labor on which the industry depends, an army of farmers has been postponing the inevitable. Squeezed by high costs and falling yields, many argue they can’t replant — and have no choice but to keep going.
The result is a significant delay to plantation renewal that will dent harvests in coming years, constraining exports from two countries that account for 85% of global production, which in turn may reduce profits for cultivators while pushing up global prices.
Oil World, a market researcher, warned last month of the consequences of an “alarming decline” in average yields due to slow replanting. Annual output growth may fall to 1.8 million tons or less in the 10 years to 2030, from an average of 2.9 million tons in the decade to 2020, the Hamburg-based outfit estimated. The El Nino weather phenomenon won’t help, and in the year ending September 2024, the annual output increase could be the smallest amount in four years.
“The concern is that the cost of production will become uncompetitive,” said Ivy Ng, head of plantations research at CIMB Investment Bank in Kuala Lumpur. “The cost is going up, labor cost is going up, everything is going up — and yet your yield is falling because you didn’t replant.”
Higher prices could also mean demand destruction, nudging large commercial buyers and households toward what are normally more expensive alternatives, like soybeans and rapeseed, especially in price-sensitive markets like India.
“In the past, palm was growing very fast and the advantage was the low cost,” Ng said. “But now you’re no longer low cost and then you’re still selling to the same market. So the question here is will the buyers be able to afford it? Can you pass on the cost?”
For governments, it may well add up to a multibillion financial aid bill. Small farmers underpin the industry, accounting for roughly two-fifths of the planted area in Malaysia and Indonesia, and they form an important voting bloc. Malaysia’s top growers’ group is already seeking tax breaks and grants in order to accelerate replanting — going well beyond an existing loan scheme — and the country’s Minister of Plantation and Commodities Fadillah Yusof said on Monday the government would seek support for cultivators in this month’s budget.
“We have bid for certain funding for replanting, in particular for the smallholders,” he said on the sidelines of a conference in Kuala Lumpur. “At the same time, we’re talking about initiatives for the big players for replanting, because now costs of doing business for palm oil and other agricultural commodities are increasing.”
Oil palms start bearing fruit at 3 years old, with yields increasing annually and peaking between 9 to 18 years. After that, the volume of fruit starts to decline, and by around 25 years, trees are typically uprooted and replaced. But the pandemic’s labor upheaval and temptingly high palm prices last year — touching a record — have thrown off that schedule.
The Malaysian Palm Oil Association estimates 664,000 hectares (1.6 million acres), or about 12% of the nation’s planted area, consists of trees aged 25 years and above. It has warned that over a third of the planted area could be classified as old by 2027. The average cost to replace them is about 20,000 ringgit ($4,265) per hectare, or almost $3 billion, according to Chief Executive Joseph Tek.
Indonesia’s smaller farmers, meanwhile, can get 30 million rupiah ($1,937) per hectare for replanting, but the nation’s palm oil association says the actual cost can be as high as 70 million rupiah. Based on the current level of assistance, Jakarta may need to provide at least $5 billion to help with the replanting costs.
Among those caught in the dilemma is Jamari, who like many in Indonesia only uses one name. Having switched from rice to palm oil two decades ago, the planter owns 2 hectares in the Riau islands. But some of his trees are now 19 and 18 meters high, and the harvest is shrinking.
“There are fewer trees that still…
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