Ageing farmers, trees hit palm oil outlook

Indonesia, Malaysia exports may fall 20%

- ASHLEY TANG NAVEEN THUKRAL BERNADETTE CHRISTINA

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 kilometres (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 fuel.

While financial markets have factored in the slowdown, there is growing evidence that plantations run by smallholders like Mr 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the next five years, according to Reuters' calculations based on government and industry projections, some previously unpublished.