Food firms set to be hit by rising palm oil prices as South East Asian production dips

By Lester Wan contact

- Last updated on GMT

This is a result of a declining fresh fruit bunches (FFB) yield of aging palm plantations, limited land for expansion, and insufficient replanting activities in Indonesia and Malaysia. ©GettyImages
This is a result of a declining fresh fruit bunches (FFB) yield of aging palm plantations, limited land for expansion, and insufficient replanting activities in Indonesia and Malaysia. ©GettyImages
Food manufacturers are expected to be hard hit by an anticipated hike in palm oil prices due to a dip in production in Indonesia and Malaysia — the world’s biggest producers.

According to Rabobank, there will be a decrease in palm oil production in from 2022 to 2025 — following the current period of abundant supply.

This is a result of a declining fresh fruit bunches (FFB) yield of aging palm plantations, limited available land for expansion as well as insufficient replanting activities in both the South East Asian countries.

“Typically, it takes four years for palm to become commercially viable, yielding close to 10 tonnes of FFB per hectare. It reaches its peak between nine and 17 years, and yields above 25 tonnes of FFB per hectare. FFB yield will decrease below 15 tonnes per hectare as palm trees become older than 25 years,” ​explained Oscar Tjakra, senior analyst of Grains & Oilseeds, Food & Agribusiness, Rabobank.

“Currently in Malaysia and Indonesia, we estimate that about 36% and 9% of palm are older than 25 years.”

Growing consumption, greater pressure

Tjakra said, in the nearer term, the current low-price environment before 2022 could lead to a higher operational efficiency in plantation companies to reduce production costs and accelerate consolidation in the industry, but warned that in the long-run it is important for producers to replant old plantations to boost supply in the region sustainably.

“Replanting programmes are also important for smallholder palm plantations, which accounted for 39% and 33%, respectively, of total palm plantations in Indonesia and Malaysia,” ​he said.

“Despite short-term challenges such as potential income loss during the first three to four years of the replanting period, sustainable replanting programmes that could prevent further deforestation and land clearing are important to boost future global palm oil production and improve productivity and welfare for smallholder farmers in the long run.”

Caution for food firms

Tjakra further highlighted that a more significant spike in palm oil prices is expected in the period of 2025 to 2030.

“In our base case scenario, I don’t think suppliers will be able to meet (food) manufacturers’ demand from 2025 onwards,”​ he said. 

He said that for some food manufacturers palm oil was an irreplaceable ingredient and there are a few ways in which they could prepare for the scenario. Food firms could hedge palm oil prices through exchanges, participate in offtake agreements with the supplier, or pass the increasing cost of palm oil on to customers.

However, he said it was also important to note that the prices of other edible oils will also increase if palm oil prices increase. Therefore, the cost of replacing palm oil will also increase accordingly.

“We believe that palm oil will still be the cheapest available edible oil as compared to other edible oils such as soy oil, rapeseed oil and sunflower oil,” ​said Tjakra.

“Palm oil also has its own specific temperature characteristics and has zero trans-fat as compared to other edible oils. Hence, it might not be an easy decision to completely replace palm oil.”

Tjakra said, should food manufacturers wish to replace palm oil as an ingredient, they would need to start planning when the appropriate time to start introducing palm oil replacers is.

“This means that they have to start investing in R&D activities to make sure that their food products have the same characteristics such as in taste, texture, trans-fat or saturated fat content, etc., as their original food products which use palm oil,” ​he said.

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