04/01/2018 (The Edge Markets MY) - MUCH has been said about Malaysia’s heavy reliance on foreign workers and the need to move up the worker-productivity ladder. It is clearly difficult to attract Malaysian workers to the plantation sector, which has led to a labour shortage and significant productivity loss in operations. This, in turn, has contributed to a loss in revenue for growers and the country.

In March 2016, the increase in levy for guest workers in Peninsular Malaysia, from RM590 to RM640, hiked the cost of production for plantations. The Minimum Wage Order 2016, which came into effect on July 1, 2016, contributed to a further rise in cost for the plantation sector. The order called for the minimum wage to increase 11% from RM900 to RM1,000 in Peninsular Malaysia and 15% from RM800 to RM920 in Sabah and Sarawak.

While the Malaysian Estate Owners’ Association (MEOA) concurs with the long-term aspiration for higher productivity and income, it believes any further increase in worker levy or minimum wage for the plantation sector without a corresponding increase in productivity in a commodity business will not achieve the nation’s desired aspiration because of unique factors pertaining to the commodity-based business model.

The Malaysian palm oil industry competes in a global market against 16 other edible oil industries. Palm oil products are commodity priced. Therefore, a higher cost structure will erode our competitiveness relative to producers in other countries. This has adverse implications for the sustainability of the industry in Malaysia in the long run. While there is room for a wider adoption of mechanisation for the evacuation of crops, especially where the terrain is suitable, the general experience to date has been a higher unit cost of production. Notwithstanding this, innovation and mechanisation in plantations must continue with enhanced focus and effectiveness.

The MEOA continues to implore the relevant authorities to expedite the recruitment and employment of foreign guest workers towards resolving the current shortage of foreign workers in the plantation sector. Is there a possibility for a one-stop centre for foreign guest workers engaged in the sector?

Being a commodity, palm oil’s products are largely price takers, not price makers. Many factors are beyond the control of growers, including the weather, competing oils, foreign exchange movements and policy changes. In recent times, crude palm oil prices have been on a volatile trend while the cost of production continued to increase unabated. This was set against the backdrop of a multitude of taxes and levies imposed on oil palm growers. Their profitability has eroded while the cash flow of new planters with borrowings or those embarking on replanting has been significantly affected.

While the CPO price recovered to some extent, following a perfect storm of low prices on low crops because of the El Niño phenomenon in 2016/17, it has again reverted to a downward trend. Against this backdrop, there is a need for the government to review the windfall profit levy, notwithstanding that it is not applicable to CPO prices at present. The MEOA calls for the WPL on palm oil to be abolished once and for all, or at least for the threshold to be adjusted to better reflect business conditions.

The WPL came into effect in 1999 to bolster the government’s coffers during the Asian financial crisis and was subsequently reintroduced in 2008. It should be pointed out that no oil palm grower is rejoicing at today’s prices, given the cumulative effect of relentless cost increases over the years. Today’s derived margin at the established threshold, if any, is certainly no windfall profit. In fact, the WPL mechanism is based on CPO production and not the actual profit of growers. It is unjustifiable to impose the WPL, especially on the newly developed oil palm plantation areas. The industry is a long-haul business and the growers need to recoup and reinvest.

Being on a non-level playing field in the global agricultural sector, the Malaysian oil palm industry continues to be heavily taxed while many farmers in the developed countries, such as the US and Europe, receive various forms of farm subsidy and other agricultural support mechanisms.

Malaysia’s oil palm growers are also subject to numerous taxes and levies, which include the MPOB cess of RM11 pmt CPO and CPKO, the MPOB price stabilisation cess of RM2 pmt CPO and CPKO, a windfall profit levy of 15% when prices exceed RM2,500 pmt in Peninsular Malaysia and 7.5% when CPO prices exceed RM3,000 pmt in Sabah and Sarawak, and prevailing corporate income tax at around 24%. There is also a CPO export tax structure ranging from 4.5% to 8.5% based on an established CPO price matrix.

The Sabah and Sarawak growers also need to absorb extra cost to account for additional freight charges. Last but not least, the Sabah and Sarawak growers pay state sales tax of 7.5% and 5% respectively on CPO on the basis of gross prices. There is also additional cost in engaging guest workers for the plantation sector, in the form of fees for the worker’s levy, work pass, visa, including multi-entry, the immigration process, Fomema, workmen’s compensation, the recruitment process and agents.

There are many other related capitation and contribution cost items as well, ranging from road accessibility constructed by the growers in rural areas and the provision of housing and amenities, including water, electricity, internet access, clinics, crèches and kindergartens and learning centres in many of the operations to quit rent, land cess, licensing and other fees involving local councils, such as property assessment tax, DOE and DOSH, inspection, import duties and so on.

The overall estimate of total cess, windfall profit levy, state sales tax and income tax for 2016 contributed by oil palm growers to the state and national coffers was more than RM7 billion. Assuming an average all-in national cost of production of RM1,950 pmt CPO, the total estimated taxes as % of profits for the year 2016 on oil palm growers was 31% of profitability in Malaysia per se with the Sabah and Sarawak growers paying more at 37% and 34% respectively.

Oil palm planting is for the long haul. Growers need to recoup and reinvest. Amid an increasingly challenging operating environment, tax incentives and government assistance are needed to ensure the long-term sustainability and competitiveness of Malaysian palm oil. Some low hanging fruit could be an extension of replanting incentives to small and mid-sized planters or tax deductions or enhanced seed-incentives for MSPO certification for the group.

The oil palm industry has transformed Malaysia into a driving force in the global edible oil market while nurturing the national economy and remaining an indispensable socioeconomic pillar in the sociopolitical landscape, especially in rural development. The industry has remained steadfast, providing employment opportunities, creating many spin-offs and generating significant foreign exchange. The entire supply chain has also contributed substantial taxes to the government’s coffers. All these aspects must be sustained to enable a win-win proposition for all relevant stakeholders.

The year 2017 marked the centennial commemoration of oil palm commercialisation in Malaysia. The journey and the collective roles played by all growers together with other stakeholders in the supply chain, along with affirming policies from the government, have been a long but successful saga and it should continue to be. The MEOA’s earnest plea to all relevant stakeholders is, let us not kill the goose that lays the golden eggs.

Joseph Tek Choon Yee is the president of the Malaysian Estate Owners' Association