25/02/2013 (The Sun Daily) - Regardless of the merits or otherwise of encouraging greater use of biofuel in this country, the proposal to blend a higher proportion of palm methyl ester (from the current 5% to 10%) with diesel to create a biodiesel known as B10 is a well-intentioned but questionable move.

Policymakers hope B10 will reduce by one million tonnes the massive overhang of 2.58 million tonnes of palm oil stocks. At best, the impact of this proposal is likely to be negligible. At worst, it is a distraction for policymakers.

Problems relating to B10's implementation will divert policymakers' attention from addressing one major issue – maintaining Malaysia's cost competitiveness as a palm oil producer despite two major constraints of land and labour.

While the inventory overhang is worrying, if the root cause is poor demand, curbing supply is effective only if the reduction is immediate and massive in volume terms.

Past experience with B10's predecessor biodiesel, B5, doesn't inspire confidence this supply-side strategy to reduce palm oil stocks will succeed.

Although B5 was launched nearly two years ago with its introduction nationwide scheduled in 2013, several questions remain unanswered.

Have the requisite blending facilities required for B5's full implementation been built? Of the 500,000 tonnes of palm oil the B5 biodiesel programme was intended to reduce from the then stockpile, what is its success rate?

If B5 has fallen far short of achieving its 500,000 tonne target, what is the basis for projecting the B10 biofuel will diminish the stockpile by twice the amount?

Instead of treating B5 as an amber light, why have Malaysian policymakers chosen to regard it as a green light?

Furthermore, subdued oil prices could make biodiesel less attractive to policymakers and to end users. Last week, prices for oil futures in the New York Mercantile Exchange fell by 2.8%, the most since the seven days ending Dec 7 last year.

Analysts are mixed about the outlook for oil prices because much will depend on economic growth of major users like the US, Europe and China.

Banking on improved exports to trim the high level of palm oil stocks isn't an option because two major purchasers face stiff headwinds this year.

This year, the Eurozone will shrink for the second successive year, after suffering four consecutive quarters of no growth last year – the first time this has happened in the currency bloc since 1995 – while India is expected to post the weakest growth in a decade.

Not surprisingly, the oversupply of palm oil coupled with lacklustre demand has prompted some to suggest the outlook for palm oil prices will be bleak.

Dorab Mistry, executive director of Godrej International, expects a major bear market in vegetable oil prices in the second half of this year.

While many will disagree with his forecast, his track record in forecasting trends in palm oil prices suggest his views must be taken seriously.

Less buoyant prices makes it even more imperative that Malaysian policymakers step up efforts to ensure this country remains a cost-competitive palm oil producer.

To enhance cost competitiveness, one option for Malaysian growers is to improve their productivity.

Admittedly, Malaysian policymakers have recognised the need to raise yields per hectare by accelerating the replanting of low-yielding oil palms, particularly those that are older than 25 years and those belonging to smallholders.

This is a massive challenge – requiring funds and manpower. As the Economic Report 2012/2013 notes, plantation companies and smallholders are required to replant within three years an estimated 365,414 hectares of low-yielding oil palms.

To encourage replanting, independent smallholders will receive from the government grants and subsistence allowances. This financial assistance side-steps the larger problems smallholders face – economic viability and succession of ownership.

Will the economic viability of smallholdings of less than 2.5ha be significantly enhanced by replanting? What will happen to the smallholdings if the owners' offspring show little interest in growing oil palms?

Even if all plantation companies replant with high-yielding palm oil clones, will there be sufficient manpower to plant, maintain and harvest these oil palms?

Given the constraints, some would argue Malaysian plantation companies should venture overseas. Several plantation companies like Kuala Lumpur Kepong and Sime Darby have already done so.

Venturing abroad may be profitable for most plantation companies, but will this benefit the Malaysian economy?

Oil palms have an economic life of at least 25 years. Planting or replanting oil palms – whether in Malaysia or overseas – is, therefore, a long-term investment.

Oil palms' longevity means policy planners must adopt a long-term approach towards the challenges this commodity faces rather than resorting to piecemeal short-term measures.

The fact is like old sins, oil palms have long shadows that reach far into the future.