28/12/2008 (NST Online) - OIL palm was introduced in the 1960s to reduce Malaysia's heavy dependency on rubber and tin. Now the country's most important commodity, it accounts for 51 per cent of world production and 62 per cent of our exports.

But history and the industry seem to have forgotten an important player -- the independent smallholders.

Unlike some 300,000 of their counterparts in the Federal Land Development Authority (Felda), Federal Land Consolidation and Rehabilitation Authority (Felcra), Rubber Industry Smallholders Development Authority (Risda) or state-owned plantations, 122,000 independent smallholders have no godfather to turn to when weathering the plunging market price.

Palm oil prices have plummeted from a March high of RM4,486 per tonne to about RM1,500 due to the financial crisis and the falling price of crude oil.

Worse, their small fruit harvest volume leaves them without much-needed bargaining power when cutting a deal, either with the palm oil millers or third-party brokers. And whereas smallholders in Sa-bah can sell to either millers or brokers, the majority of smallholders in the peninsula have to sell to brokers.

Smallholder Ali Sangi likens the scenario to selling old newspapers: "You have to wait and take whatever they offer. Usually what you get is really meagre."

With wheeling and dealing by millers and third-party brokers, smallholders have nothing to win but almost everything to lose with the crude palm oil (CPO) price now below RM2,000 per tonne.

For three months since September, Ali had no choice but to let the oil palm fruits rot at his 80ha family plantation in Kinabatangan, Sabah.

Oil palm millers refused to buy any fresh fruit bunches because the market price was low and harvesting would mean he had to pay contractors.

The family plantation was losing RM80,000 to RM90,000 a month. It was a lucky thing that Ali kept his day job at a printing company.

Poor market demand has forced millers to process less CPO and subsequently purchase less fresh fruit bunches. Millers take care of their important clients, the big plantations -- and smallholders end up taking the cut.

Although the price is determined by the Malaysian Palm Oil Board (MPOB), based on the global market price of CPO and oil extraction rate (OER) of the fresh fruit bunches, graded by the size and maturity of the bunches, smallholders are still at the mercy of the buyers, be it the millers or third-party brokers.

To expand their narrowing profit margin, Ali claims some millers and third-party brokers have resorted to dirty tactics of deliberately downgrading the fresh fruit bunches, or mixing the lower with the higher grades so they could pay less, while others would cheat on the weight.

Fruit grading is conducted by generalising the size of the bunches, and staff in charge at the mill decide the price for fruits from the smallholders based on OER set by MPOB.

If the mill wants to squeeze more profit, it would grade the fruits to have less oil extraction and buy it at a lower price. Ali adds that in Sabah, smallholders are made to pay extra charges of up to RM55 per tonne. This includes transportation fees to refineries in Peninsular Malaysia -- although Sabah has its own.

Ali says when the matter is brought up to MPOB, the agency's reply is it is a business deal between the miller and smallholders.

"You can't escape the reality that everybody wants to make a profit, but it seems that we are at the losing end because we do not have any bargaining power. We have to accept what the buyers decide to pay, even when we know it is not fair trade," says Ali.

All they could do is lodge a complaint, says Faiz Abdul Rahman, National Association of Smallholders information chief. MPOB will conduct an inquiry and will take action against the errant third-party brokers and millers.

"We want the authorities to be more proactive by conducting stringent checks on the millers and third-party brokers and not react only when a complaint is lodged."

The prices of CPO dipped lower in 2000 to RM695 per tonne -- but back then the operational costs, including fertilisers, chemicals and labour, was only about RM500 in an efficiently run estate.

The cost has now more than tripled, making it impossible for smallholders to break even.

An agronomist at a public listed plantation company says that the percentage of operational margin in an efficient estate has not differed much between 2000 and now. However, their advantage is in the volume of yield and milling their own CPO.

He says that fertilisers take a bigger bite of the operational cost pie. In 2000, the cost of muriate potash fertilisers was less than RM1,000 per tonne but recently the price has leapt to RM3,200-RM3,500.

The same hike applies to labour and chemical costs. Compared to the big players, he says, the smallholders are oppressed competitors.

However, some innovations at the national level could bring benefits which will trickle down to the smallholders.

Last month, the country's first consignment of "green" palm oil arrived on Britain's shores.

Accredited by an international agency, the Roundtable Sustainable Palm Oil (RSPO), the sustainable palm oil was developed according to an ethical certification system, including commitments to preserve rainforests and wildlife.

The 500-tonne shipment was produced by United Plantations with Unilever, and Britain's third largest grocer J. Sainsbury among the buyers, spelling a shift of palm oil's image in the European Union (EU) market.

Sustainable palm oil could gradually erase the poor image of oil palm on a host of issues such as mono-agriculture, bio-diversity, illegal logging and de-forestation, and make it more environment-friendly, says RSPO secretary General Dr V Rao: "The percentage is still very low but we believe there will be an increase in volume next year and eventually most of the plantation companies will be applying for the certification."

Although the bigger slice of the market is still China and India, Rao is positive that EU is opening doors to local palm oil--but the bigger issue at hand is moving the country's immense two million tonne palm oil stock.

The Ministry of Plantation Industries and Commodities has introduced two immediate measures: cutting down production by replanting and increasing local demand by introducing biofuel.

The replanting scheme, says deputy minister A. Kohilan Pillay, offers RM1,000 per hectare to replant 25-year-old trees, which have lower yield and lower quality fruit bunches.

"The prices will bounce again and when they do, the planters will have better yields with the younger trees," he explains. This will also mean less production cost. But not everyone can apply this measure, especially smallholders with small acreage. Replanting means zero income for the next three years.

Faiz says the government has been slow to come up with effective measures to stabilise the price, even after the price plunge in 2000. "They should have learnt from the year 2000 experience but when the price rebounded to new heights, whatever measures taken and outlined during the crisis were shelved and forgotten," he says.

Back then, biofuel was the buzzword. Palm methyl esters in a B5 blend of five percent processed palm oil with 95 percent fossil fuel were used for generators, but enthusiasm later died down.

Now when the same crisis has re-emerged, policy-makers are scrambling to make it compulsory for government-owned heavy vehicles and vans to substitute B5 for diesel in February. Faiz says if only this had been introduced earlier, local consumption of CPO would have been higher, working as a price stabilising factor.

Faiz wants the government to look into creating a ceiling price for fertilisers and chemicals, which will help ease the burden of smallholders, while intensifying research and development to continuously create new palm oil products. New products would certainly lead to wider use of palm oil in hte local market and further stabilise the price, he claims.

Government agencies like MPOB should take into account the contributions made by smallholders, Faiz urges. Smallholders, including those under the government scheme, contribute up to 35 percent of the national average CPO production. "The government should not neglect us," he says.