15/3/07 (Bloomberg) - MALAYSIA, the world's largest palm oil producer, may raise output by 2 million tonnes a year by boosting yields as the country runs short of new plantation land, the head of the nation's palm oil council said.

The country, targeting a harvest of 16.5 million tonnes this year, could boost productivity by 0.5 tonne a hectare from last year's 3.9 tonnes, said Tan Sri Dr Yusof Basiron, chief executive officer of the Malaysian Palm Oil Council.

Over five to 10 years, average yields may even reach 6 tonnes, potentially raising output by 50 per cent, or by 8 million tonnes, he said.

Malaysia and Indonesia, which account for about 85 per cent of global palm oil output between them, are racing to raise output to benefit from surging demand and prices. The commodity is used in foods such as chocolate and, increasingly, as an additive that is blended with conventional fuels.

"It's a question of teaching smallholders to use good seedlings, fertilise, maintain good soil conditions and manage plantations," said Carl Bek-Nielsen, vice chairman of United Plantations Bhd. "The best Malaysian plantations can achieve 6 tonnes a hectare."

The average palm oil price on Bursa Malaysia Derivatives Exchange, which trades the benchmark contract, gained 11 per cent in 2006 compared with the year before. The price declined as much as RM22, or 1.1 per cent, to RM1,955 a tonne yesterday and traded at level at 3.11pm.

"We don't have the luxury of expanding land" planted with oil palms to raise production, Yusof said in an interview in Kuala Lumpur yesterday. The council promotes the use of the commodity.

Still, "the current planted area is capable of at least putting 50 per cent more palm oil into the world market" over five to 10 years if yields are raised, he said.

The eventual yield target of 6 tonnes per hectare is "very achievable", said Yusof.

Malaysian plantation companies such as IOI Corp Bhd and United Plantations have already achieved yields of that level, he said.

Average yields in Indonesia are about 2.3 tonnes a hectare because most of the crop is produced by smallholders, said Maruli Gultom, president-director at PT Astra Agro Lestari, Indonesia's largest producer.

Malaysia's Plantation Industries and Commodities Minister Datuk Peter Chin Fah Kui has said that boosting yields is the only viable way to increase output as the nation is almost out of suitable land for new plantations. "We have no other choices," Chin said in September last year.

The country boosted the total cultivated area of oil palm by 3 per cent last year to 4.2 million hectares compared with the 4.5 per cent gain in 2005, according to a government estimate issued in September.

IOI, the world's largest oil palm grower, said last month it planned takeovers in South-East Asia to extend its plantations by a third. The company, based in Putrajaya, had a "few targets in mind," said executive director Lee Yeow Chor. - Bloomberg