Palm oil dilemma: Why Malaysia’s second-largest commodity export continues to face uncertain future

By Pearly Neo

- Last updated on GMT

Malaysia is the second-largest palm oil producer in the world and the commodity is also the country’s second-largest export in terms of value - but the local palm oil industry as a whole faces an uncertain future due to volatile prices and continuing opposition by the EU. ©Getty Images
Malaysia is the second-largest palm oil producer in the world and the commodity is also the country’s second-largest export in terms of value - but the local palm oil industry as a whole faces an uncertain future due to volatile prices and continuing opposition by the EU. ©Getty Images

Related tags Malaysia Palm oil

Malaysia is the second-largest palm oil producer in the world and the commodity is also the country’s second-largest export in terms of value - but the local palm oil industry as a whole faces an uncertain future due to volatile prices and continuing opposition by the European Union (EU).

According to​, as of September 2019 Malaysia’s total palm oil commodity export value stood at US$8.94bn, behind only refined petroleum (US$10.9bn). It was also the country’s top agricultural export, far in front of coconut oil which came in fifth at US$977mn.

Malaysia is also the second-largest palm oil producer and exporter globally with 32.6% of the international palm oil industry market share, behind Indonesia (51.7%).

That said, the export value of palm oil has been described as ‘volatile’, particularly given that the country has seen a 42.1% drop in palm oil shipment export values over the five years from 2015 to 2019.

A major contributing factor that has been attributed to the decline of palm oil in recent years is the EU’s adversarial attitude and outright hostility towards the commodity. In March last year, the EU concluded that palm oil cultivation was ‘associated with the highest level of deforestation’​ based on ‘best available scientific data’​ from 2008 to 2015.

Based on this, palm oil was deemed as an ineligible raw material source that would count towards the EU’s Renewable Energy Directive, which lines out renewable transport targets (32% of renewable energy usage by 2030) for national governments.

In addition, new limits on food contaminants in refined fats and oils, including palm oil, are also being considered. The EU is looking at imposing a limit for 3-MCPD esters, which it says pose ‘potential health concerns’​.

According to Malaysian Minister of Primary Industries Teresa Kok, these new rules ‘may have an impact on palm oil consumption in food products’​, and the ministry is trying to counter the potential negative effects.

“The palm oil industry in Malaysia has been instructed (by the government) to adhere to the EU-prescribed level of 3-MCPDE of 2.5 ppm for food products by 2021,”​ she told Reuters​.

“We are now in the process of enforcing several regulations to ensure that palm oil produced meets the acceptable safety level for 3-MCPDE.”

Prime Minister Tun Dr Mahathir Mohammad had also said at a palm oil conference that Malaysia would be taking the matter to the World Trade Organisation by filing a complaint, and also threatened other retaliatory actions such as boycotting EU products.

"If certain importing countries choose to impose discriminatory trade barriers against palm oil-producing countries, we must not keep silent nor hesitate to take countermeasures,"​ he said.

"If there is any evidence that such discriminatory trade practices are in violation of any international laws, Malaysia and other producing countries under the Council of Palm Oil Producing Countries must seek intervention from the World Trade Organization.”

What’s next for Malaysia?

Although the EU has repeatedly claimed that ‘there is no such thing as a ban on palm oil’​, because the union has till date been one of the largest import markets for the country, these changes have had very real impacts, and the government has been trying to figure out alternate routes despite its strong stance against any palm oil accusations.

Crop diversification is one example where Malaysian Minister of Agriculture and Agro-based Industry Salahuddin Ayub has said that planting more food crops, particularly fruits and vegetable, on agricultural land including in oil palm plantations may be the way forward.

“For example, papaya, jackfruit, vegetables like chillies, tumeric, ginger. Their prices are all good, very high now,”​ he told The Straits Times​.

“I'm recommending that some of the paddy fields be planted with fragrant rice. The price it fetches is higher.

“We are also focused on identifying abandoned land, which will be used to plant cash crops.”

Former Finance Minister Tun Daim Zainuddin also said at a conference that coconuts are a ‘future crop’​ but not palm oil.

Purposeful trade war

The EU’s reasoning behind its negative attitude towards palm oil as a whole has been called out by both governments and palm oil supporters as being both ‘politically-motivated’​ and ‘without scientific basis’​.

“[This] is discriminatory against the economies of developing nations in Southeast Asia, Africa and Latin America which produce palm oil, [and] it is designed to hurt the livelihoods of millions of small farmers,”​ Kok told Mongabay.

Pro-palm oil monitoring site Palm Oil Monitor​ has gone a step further, accusing the EU of ‘knowngly starting [an] EU-ASEAN ‘trade war’’​, providing documents that they claim show evidence of this.

In the documents, which FoodNavigator-​Asia has viewed, EU Director General for Trade Jean Luc Demarty had written to Director General of Energy Dominique Ristori advising against the ‘discrimination’​ of any biofuels as the ‘safest option to avoid risks of incompatibility with the EU’s obligations under the WTO’.

Palm Oil Monitor​ added that: “The hostile attitude towards palm oil is the result of the aligned interests of several groups [including] green NGOs and politicians who dislike the expansion of agriculture developing countries, [and] oilseed European rapeseed farmers who can’t compete with palm oil.”

“European bureaucrats struggle with the disruptive impact that palm oil has on food and feed crops in the EU – this is because if European farmers don’t plant oilseeds, demand for imported animal feed in the EU increases.”

Hanging on to palm

That said, it does not appear that Malaysia will be giving up on palm oil any time soon.

According to Kok, even though palm smallholders were facing immense challenges due to the current industry environment as well as social evolution (where many smallholders’ children got better educations and thus no longer tended the lands themselves), very broad opportunities for the industry still exist.

“It is hard to imagine a scenario wherein [palm oil] can be replaced by other oils, including coconut, for its pricing, functionality and versatility,”​ she told Daily Express.

“Tun Daim has rightly pointed out that the future for palm oil hinges upon creating more food demand, through diversification of applications and new product innovations – [we] simply need to pay greater attention to our current cultivation and processing practices.”

She encouraged oil palm farmers to takes steps such as utilising higher oil-yielding varieties and practising inter-cropping with other highly-priced crops such as coconuts and pineapples.

“This way, they won’t be so affected when the palm oil price is low.​ […] I see no reason to aggressively switch away from oil palm cultivation. The demand for the oil is quite assured.”

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