Download M3.3.1 Oil Palm Production Costs and Economies of

Influences upon palm oil production
costs
Presentation to the Fedepalma Congress,
Cartagena de lndias, September 2015
by Dr James Fry, Chairman, LMC International
www.LMC.co.uk
25/09/15
©LMC International, 2015
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The key factors influencing production costs
I am going to try to cover a lot of ground today, since
the influences on production costs are so many.
Among the more important I will review today are:
•   Trends in yields and the impact of palm age profiles
•   Labour productivity and fertiliser consumption
•   Production costs, with and without by-product credits
•   The recent sharp swings in exchange rates
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©LMC International, 2015
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Trends in palm oil yields per hectare
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You will be familiar with the yield of oil palms over
their life cycle. We apply this profile to estimate
average yields over the life time of all palm areas.
120%
% of average yield
100%
80%
60%
40%
20%
0%
0
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4
8
12
16
Year after planting
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The yields over the lifetime of oil palm plantings
we call “adjusted yields”. This adjustment raises
Indonesian yields more than Malaysian yields.
Tonnes of CPO per mature hectare
5.0
4.5
4.0
3.5
3.0
2.5
2.0
2000
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2002
2004
2006
Actual Malaysia
Actual Indonesia
2008
2010
2012
Adjusted Malaysia
Adjusted Indonesia
©LMC International, 2015
2014
5
The impact of the adjustments is revealed if we
compare actual vs adjusted yields in high yielding
Sabah and low yielding Sarawak in Malaysia.
Tonnes of CPO per mature hectare
5.0
4.5
4.0
3.5
3.0
2.5
2.0
2000
25/09/15
2002
2004
2006
Actual Sabah
Adjusted Sabah
2008
2010
2012
Actual Sarawak
Adjusted Sarawak
©LMC International, 2015
2014
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Yield adjustments are highest when a region has a
high share of young trees. Colombia has a much
higher immature share than other important areas.
35%
Immature %
30%
25%
20%
15%
10%
2008
2009
Colombia
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2010
Indonesia
2011
2012
Malaysia
©LMC International, 2015
2013
2014
Sarawak
7
Here I have made a brave attempt to guess how
yield adjustments for age would affect the CPO
yield per mature hectare in Colombia.
Tonnes of CPO per mature hectare
4.5
4.0
3.5
3.0
2.5
2008
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2009
2010
Actual Colombia
Adjusted Colombia
2011
2012
2013
Actual Sarawak
Adjusted Sarawak
©LMC International, 2015
2014
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Be careful when comparing oil palm yields
Recorded CPO yields per mature hectare are highest
in Malaysia, followed by Indonesia and Colombia .
In all three countries, the recorded yields have been
flat or even declining since 2008.
However, the recorded yields fail to take account of the
implications of the wave of new plantings made from
2007, which reduced the average age of mature areas.
For this reason, we at LMC now build up age profiles of
oil palm areas by country, region or company to be able
to estimate their underlying age-adjusted yields and
deduce the impact on their production costs.
The next slide illustrates this for a big plantation group.
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©LMC International, 2015
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350
4.9
300
4.7
250
4.5
200
4.3
150
4.1
100
3.9
50
3.7
0
3.5
Normal
Age adjusted
Variable cost
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Age adjusted CPO yield (mt/ha)
Variable production cost per tonne of CPO
This company’s CPO yield in 2014 was 4.7 mt/ha.
and its age-adjusted yield 4.4 mt/ha. Applying the
adjusted yield, its cost rose from $267 to $290/mt.
CPO Yield
©LMC International, 2015
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Continuing consideration of production costs
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Oil production costs before credits, $/tonne
Oil palm records much lower production costs
per tonne of oil than annual oilseeds .... but only
before one allows for by-product credits.
1,400
1,200
1,000
800
600
400
200
0
Soybean
2000-2004
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Rapeseed
Sunflower
2005-2009
©LMC International, 2015
Palm
2010-2014
12
Soybean processors, in particular, have been
enjoying high credits from the sale of their meal
output. Oil palm credits from kernel are smaller.
Meal and PK credits, US$ per tonne of oil
1,600
1,400
1,200
1,000
800
600
400
200
0
Soybean
Rapeseed
Sunflower
2000-2004
2005-2009
2010-2014
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©LMC International, 2015
Palm
13
Oil production costs, net of credits, $/tonne
If you deduct by-product credits from production
costs of oils (where land values are not included in
field costs), soybean oil costs are now negative!
600
500
400
300
200
100
0
-100
-200
-300
Soybean
2000-2004
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Rapeseed
Sunflower
2005-2009
©LMC International, 2015
Palm
2010-2014
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Real CPO production costs have risen with higher
input costs, notably labour. Costs in 2010-2014 in
Malaysia and Colombia were above 1985-1989.
Real CPO production costs, US$ per tonne
700
600
500
400
300
200
100
0
Colombia
1985-1989
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1990-1994
Indonesia
1995-1999
2000-2004
©LMC International, 2015
Malaysia
2005-2009
2010-2014
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The detailed data from the US reveal how much
harder it has become for its soybean farmers to
reduce their production inputs further.
Annual change in elements of US field costs
6%
4%
2%
0%
-2%
-4%
-6%
-8%
Fertliser
Chemicals
Fuel & Energy
1992-1994/ 1982-1984
2002-2004/ 1992-1994
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©LMC International, 2015
Labour
Total
2012-2014/ 2002-2004
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Lowering production costs has become difficult
The annual oilseed crops have enjoyed a bonanza as
a result of high by-product credits from the sale of
meal, which are much more important per tonne of oil
than oil palm’s credits from the sale of palm kernel.
Trends in production costs, before the deduction of byproduct credits, seem to be pointing slowly upwards.
Maybe this is due to complacency from high prices.
Input price rises have made things difficult for oil palm
producers, with wages rising quite rapidly in South
East Asia, for example.
I now turn to consider the impact of these inputs.
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©LMC International, 2015
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Labour and fertilisers, the major palm inputs
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Malaysian and Indonesian costs of employing
general field workers in US$ in 2014 were 320%
and 380%, respectively, of their 2001 levels.
General labour daily cost to employer, US$
16
14
12
10
8
6
4
2
0
Malaysia
2001
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Indonesia
2005
2009
2014
©LMC International, 2015
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In Malaysia, this has prompted an increase in the
mature area per worker in recent years. However,
part of this rise has been due to labour shortages.
Malaysia, total mature hectares/worker
12
10
8
6
4
2
0
1950
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1960
1970
1980
1990
©LMC International, 2015
2000
2010
20
Here I contrast the total area (both mature and
immature) per worker in Malaysia and on estates
in Indonesia, where the trend is at best flat.
10
9
8
Hectares per worker
7
6
5
4
3
2
1
0
2010
2011
2012
Indonesia
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2013
2014
Malaysia
©LMC International, 2015
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Fertiliser/CPO Price Ratio 2000-2014 =100%
Fertiliser is also a crucial input. Here I plot not the
price of fertilisers, but the fertiliser-CPO price ratio.
One can understand why its use is now falling.
350%
300%
250%
200%
150%
100%
50%
0%
Jan-03
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Jan-05
Jan-07
Jan-09
Jan-11
©LMC International, 2015
Jan-13
Jan-15
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The impact of cutbacks in fertiliser use in reaction
to high fertiliser prices may be seen in the yearon-year CPO growth cycle in Malaysia.
Yr-on-yr Malaysia output change
40%
30%
20%
10%
0%
-10%
-20%
1997
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1999
2001
2003
2005
2007
2009
©LMC International, 2015
2011
2013
2015
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Spending on inputs is set to fall significantly
The reduction in fertiliser use in response to the failure
of fertiliser companies to reduce their prices will
undoubtedly cut cash costs of CPO production and will
hit output growth next year, compounding the effect of
drought on oil palm yields.
In the case of labour costs, there have been two new
developments: cutbacks in field maintenance and in
the frequency of harvesting rounds; and (totally
outside the control of the oil palm sector) the sharp
devaluations of the currencies in many oil palm
producing countries.
I conclude by examining the effect of currency turmoil.
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Exchange rate fluctuations
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Most oil palm producing countries have seen
their exchange rates (local currency/US$) soar
since 2012. Ecuador has been tied to the US$.
Exchange rate index, average 2012 = 100
200
180
160
140
120
100
80
Oct-13
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Jan-14
Malaysia
Apr-14
Jul-14
Indonesia
Oct-14
Jan-15
Apr-15
Jul-15
Colombia
Brazil
Ecuador
©LMC International, 2015
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Local CPO price index, average 2012 = 100
Devaluations have softened the impact of the
fall in the world CPO price, when it is expressed
in local currencies.
120
110
100
90
80
70
60
50
40
Oct-13
Jan-14
Malaysia
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Apr-14
Jul-14
Indonesia
Oct-14
Jan-15
Colombia
©LMC International, 2015
Apr-15
Brazil
Jul-15
Ecuador
27
I end with the consumer view, showing how CPO
prices have moved in local currency in importing
countries. (Brent is a proxy for crude oil exporters)
Exchange rate index, average 2012 = 100
160
140
120
100
80
60
40
Oct-13
Jan-14
US
25/09/15
Apr-14
Jul-14
EU
Oct-14
Jan-15
India
©LMC International, 2015
Apr-15
Jul-15
Brent
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Input cost reductions may help many palm
producers to manage current low prices.
It seems highly unlikely that fertiliser prices will be able
to withstand the pressures they face from falling sales,
not just from oil palm producers but also from growers
of annual crops whose prices have fallen back.
For those countries that have devalued substantially
against the US$, these devaluations, until they feed
through to inflation and pressure for higher wages, will
lessen the immediate impact of low CPO prices.
Whatever happens, CPO production will respond in
2016 and help to raise CPO prices. However, a word
of caution: don’t forget that higher prices will affect
demand, both if soy oil becomes competitive and if
biodiesel demand is reduced.
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©LMC International, 2015
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This presentation and its contents are to be held confidential by the client, and are not to be disclosed, in whole or in part, in any
manner, to a third party without the prior written consent of LMC International.
While LMC has endeavoured to ensure the accuracy of the data, estimates and forecasts contained in this presentation, any decisions based on them (including those involving investment and planning) are at the client’s own risk. 25/09/15
LMC International can accept no liability regarding information analysis and forecasts contained in this presentation.
©LMC International, 2015
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