01/05/2012 (Agrimoney.com) - Will palm oil echo sugar?

Last year, sugar prices defied forecasts of marked decline after the output in Brazil, the top producer, fell for the first time in more than a decade, depressed by yield declines in its major Centre South district, where growers let cane stands go unplanted well beyond the ideal age.

Palm oil may be facing a similar dynamic, thanks to the ageing of oil palm trees.

More than 20% of trees in Malaysia, the second-ranked producing country, are more than 25 years old, "after which yields plummet", Standard Chartered said.

The failure to replant has left palm oil production facing "a severe structural slowdown" which "will worsen over coming seasons, and is one the market can no longer afford to ignore", the bank said.

'Crucial decoupling'
Indeed, this year should be a positive one for palm oil yields given that it witnesses the tail of a La Nina weather pattern which, while presenting short-term production problems in South East Asia thanks to heavy rains, boosts follow-on yields.

Even last year, "the sharp improvement in yields in South East Asia after La Nina subsided had an inverse effect on market prices", Standard Chartered analyst Abah Ofon said.

"Markets quickly unravelled as tight production, which provided a major support, was undermined."

However, the bank forced a "crucial decoupling between weather events and palm oil output" this year, thanks to ageing plantations

"La Nina weather conditions will not naturally, as in the past, lead to higher output."

'Underinvestment theme'
The pressure on productivity will be exacerbated by the growing costs of running plantations, which are "extremely labour intensive", besides requiring high spending on fertilizers and fuel, and so encouraging scrimping by managers.

In Malaysia, the need to keep workers has required pay rises which mean that wages bill for the average plantation accounts for 30-40% of total costs, compared with about 20% in 2002.

While labour is less of a problem in Indonesia, the top-ranked producing country, where more than 40% of plantations are in the hands of smallholders who undertake the work themselves, these growers are less willing to fork out for fertilizers, and often plant low-quality seed.

"Underinvestment in fertility management is a theme that seems to run through many palm oil plantations in Indonesia," Mr Ofon said.

He forecast palm oil prices rebounding to average 3,700 ringgit a tonne in the last quarter of 2012, a price not seen since February 2011, while remaining above 3,200 ringgit a tonne for the next three years.

'Higher production costs'
Separately, IndoAgri, the Indonesian palm oil group, highlighted the sector's growing expense by revealing earnings down 27% to 377bn rupiah in the January-to-March period, despite a 9.3% rise in revenues to 3,199bn rupiah.

The decline reflected largely "higher costs of production", said the group, which also grows some rubber, sugar cane and tea on its 255,000 hectares of plantations.

And Anglo-Eastern Plantations cautioned that "rising fertilizer costs and wages in Indonesia are expected to increase the overall production cost in 2012", after a 2011 in which underlying pre-tax profits soared 49% to $99.4m, on revenues up 38% at $259.0m.

Anglo-Eastern Plantations shares closed 0.9% higher at 800p in London, while IndoAgri shares closed down 0.4% at Sing$1.425 in Singapore.