14/09/2008 (Borneo Post Online) - IT is hardly surprising that the price of crude palm oil (CPO) price is expected to remain “soft” at US$700 or less per tonne within the next six months to Feb 2009.

The reason is the build-up of supplies and news of defaults among buyers in India and China. This is not exactly good news for plantation companies in Malaysia , the world’s largest CPO producer, and there are some lessons to learn from it.

In Sarawak, a growing percentage of the land area is planted with oil palm, supported by an increase in the number of mills. Evidently, this involves a huge financial investment both in terms of the acquisition of land, planting, harvesting cost and milling.

The oil palm industry is also heavily reliant on foreign labour whose cost is also going up. On top of this, the industry is subject to the new windfall tax, among other dues and taxes to be paid. Production costs have been hit by increasing prices of fertilizer inputs as well.

If the CPO prices remain soft for an extended time, say, beyond Feb next year, due to the aforementioned as well as other new factors, including a slowing down in the regional and global economy, there is a real possibility that the industry will be hard hit. Already, smallholders are feeling the pinch with rising costs of products brought about mainly by the doubling in prices of chemical fertilisers and the significantly reduced prices of fresh fruits bunches (FFB).

The logical thing to do is to reduce the expansion of planted acreage, and for investors to concentrate on improving yield on existing planting, and for those with large-scale investments, to diversify into bio-fuel production, which is, in fact, what keeps prices at the present level.

Demand for bio-fuel may slow down if the world’s crude oil prices continue the slide to US$100 per barrel or lower – although it is, in a way, welcomed in other sectors of the economy, and by the world’s consumers who had, in the recent past, been reeling from the effects of escalating oil prices, including Malaysia.

One lesson to learn from all these is that it is extremely necessary for an economy to plan for controlled growth because the consequences of over production or over building in supplies such as in palm oil could be dire, both in short and long terms.

The mistake we tend to make is when the price of a particular commodity begins to spiral, we look at it as something to be cheerful about, and start investing without sparing any thought to the possible consequences in the event of a serious over supply situation as is happening now in the CPO market with brokers taking the full advantage (again) to try and maintain their margins at the expense of producers and manufacturers.

The benchmark November crude palm oil contract on the Bursa Malaysia Derivatives Exchange was down 3.65 per cent at RM2,379 (US$689.5) a tonne.

Against a backdrop of pricing uncertainty, perhaps, we should take the cue from a leading industry analyst, James Fry, who said palm oil prices are likely to hover around US$700 per tonne until February next year as the demand for biofuels will support prices.

According to the analyst, palm oil prices will also find support around RM2,300 because of the biofuels demand … unless, of course crude oil falls faster than expected.