15/03/2010 (Reuters) - A windfall tax on Malaysian palm oil earnings that kicked in from November last year has capped gains as buyers see it as a signal to slow purchases, a top industry official said on Monday.

Malaysian Palm Oil Association (MPOA) Chief Executive Mamat Salleh said the 15 percent windfall tax on a tonne of crude palm oil was triggered on companies in the world's No. 2 producer when prices rose above 2,500 ringgit ($756.4).

"This automatically provides a psychological barrier which prevents prices from going higher. Why should we as producers cap our crude palm oil price increases?" Namat said speaking at the Reuters Food and Agriculture Summit.

"The windfall tax may collect millions of ringgit in tax revenue, but it may lose us the opportunity to earn billions of ringgit in export earnings."

Palm oil is a tropical oil used to make everything from soap to spongecake and is also widely used for cooking.

Mamat forecast a 30 percent leap to 65 billion ringgit in palm oil export earnings for Malaysia in 2010 compared to last year as the demand and supply outlook should support prices between 2,500-3,000 ringgit.

Plantations in mainland Malaysia are subject to a 15 percent tax when crude palm oil prices cross 2,500 ringgit. In top palm oil producing states Sabah and Sarawak on Borneo Island, planters face a 7.5 percent tax when prices go above 3,000 ringgit.

The palm oil industry has said the tax, when added together with other levies, makes the commodity the most taxed vegetable oil in the world.

The government however says palm oil companies should not complain as recent corporate earnings have netted strong profits that should be used in part to subsidize cooking oil prices.

"The funds from the windfall tax are being used to finance the cooking oil subsidy. The subsidy scheme is not effective in meeting its target and not efficient due to large leakages," Mamat said.

The cooking oil subsidy reached 1.3 billion ringgit last year from 26 million ringgit in 2005. The subsidized cooking oil price stands at 1,700 ringgit a tonne.

The current market prices are about 2,700-2,800 ringgit a tonne.

MPOA groups more than 100 producers including giants like Sime Darby (SIME.KL), IOI Corp (IOIB.KL) and Kuala Lumpur Kepong (KLKK.KL).

REPLANTING LAGS
Mamat also said a 2008 plan by Malaysia to subsidize the replanting of 200,000 hectares a year of older or diseased palm trees to support prices by culling among the 4.7 million hectares planted has lagged.

Historically since the 1960s, Malaysian palm planters have focused on expansion, Mamat said, over replanting because subsidies were too small to make a big impact.

In the most recent plan the government had allocated 200 million ringgit to fell diseased and old oil palms, equivalent to 1,000 ringgit a hectare, which works out to a two decade timeframe to replant the planned area.

"At a five percent replanting rate, it will take 20 years to replace the whole oil palm tree stock," Mamat said, adding his own estimate sees the cost at 10,000 ringgit a hectare, or 2.5 billion ringgit.

Last week, the Commodities Minister Bernard Dompok said only 17.9 percent of its replanting target as of February this year was achieved.