May 25, 2011 / 10:42 AM / 8 years ago

Analysis: Land banks buffer Indonesian palm oil from forest ban

JAKARTA/KUALA LUMPUR (Reuters) - Palm oil firms in Indonesia can overcome a two-year ban on forest clearing by tapping into land reserves, but they face bigger problems attracting the labor needed to work the soil and boost yields.

The ban, effective from Friday, limits access to sensitive peat and forest regions and removes much of the uncertainty that had hung over the palm industry as Jakarta finalized the details.

Plantation firms can now turn their attention to how best to bring massive land banks into rotation profitably and how to boost yields from existing acreage, industry experts said.

“The moratorium is not about to create some supply shock although planters in Indonesia will be cautious on how they move forward in this new environment,” said Abah Ofon, a Singapore-based commodities analyst with Standard Chartered.

“Investing in yields and falling back on their land banks will take on more importance. I think planters are already taking that on as a strategy.”

To compete with soyoil suppliers for the top vegetable oil markets in India and China, the world’s top palm oil producer needs to produce more palm oil per hectare.

The UN’s Food and Agriculture Organization data show Indonesian average, annual yields stand at 18 tonnes of fresh fruit bunches per hectare, lower than Malaysia’s 20 tonnes in 2009 and keeping productivity in the region at 76 percent of estimated potential.

“Indonesia has been getting by with the sheer volume of palm oil coming from large, maturing plantings,” said an agronomist with a Jakarta-listed plantation firm. “With the moratorium, there is a cap and now, planting right and yields really matter.”

Uncertainty in the longer term over the moratorium still exists. Planters still face the question as to whether the moratorium will be extended after the two years is up, yet more reason for them to concentrate on boosting yields from existing acreage.

OUTPUT GROWTH SLOW

Indonesia on Friday froze new permits on forest clearance to secure a $1 billion deal with oil and gas rich Norway that aims to preserve 64 million hectares of carbon rich forests and peat lands across the archipelago to slow global warming. Palm oil estates already sprawl across seven million hectares of Indonesian land and are expected to produce 24.3 million tonnes of the edible oil this year, according to government estimates.

This represents growth of 1.2 million tonnes on the year, half of the extra 2.5 million tonnes a year that industry analysts say is required to meet rising global demand.

The slower growth is partly attributed to lower palm estate expansion to between 200,000 and 300,0000 hectares per year as the ban was debated over the past year or so, versus 500,000 hectares in 2008.

Strong demand and supply constraints for palm oil have supported benchmark palm oil futures, which are expected to hit a record average of 3,300 ringgit ($1,095) per tonne this year after heavy rains cut output. That would be nearly 16 percent above the previous record average in 2008.

The price hit a 2011 high of 3,967 ringgit in February. The average for the year to date stands at 3,498 ringgit.

CONCESSIONS

To get the ban approved, Jakarta made concessions to the $30 billion global palm oil industry and other key sectors to exempt permits already granted in principle by the forestry ministry. Planters say this preserves the bulk of their land banks.

Major listed planters operating in Indonesia are expected to plant around 10,000 hectares on average per company annually. At that rate, even the companies with the smallest land banks will take two years to run them down. Companies with the largest land banks have enough to last 30 years without running out of reserves, Reuters calculations on company data show.

“I don’t think (the moratorium) for us makes any difference because we have quite a lot of land bank,” said Sebastian Sharp, head of investor relations at Jakarta-listed BW Plantation. “Our land bank is about 98,000 hectares. It all has permits.”

The country’s top planter, Singapore-listed Golden Agri Resources, for example, holds 442,500 hectares of planted land. A third of that holds immature oil palms that will reach their peak output phase in one to seven years.

BIGGER THAN THE MORATORIUM

Palm oil firms in Indonesia are struggling to meet their planting targets after torrential rains last year stalled work. They are also struggling to find the around 2,000 workers needed to plant and maintain land blocks of 10,000 hectares a year.

“Land with permits is available, but getting reliable labor to do the most effective planting is a bigger issue than the moratorium,” said an official with listed Malaysian planter owning permits to develop land in Kalimantan.

There is a limited pool of specialised labor available for plantation work, and a skilled workforce is even more important to planters working toward boosting yields. It can take years to train people to work on palm oil plantations and Indonesian and Malaysian platers are vying for the available workforce.

Such constraints could spell an opportunity for cash-rich planters able to spend on mechanising the harvest now mostly done by hand and developing better planting materials. But it will take time for that kind of investment to show rewards.

“Raising yields is easier said than done,” said leading industry analyst Dorab Mistry, head of trading for Godrej International. “It will take 10 years for significant quantum leap in yields and that is not a promise the world can rely on.”

Editing by Ed Lane

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