23/06/2011 (Reuters) - Malaysia, the world's No.2 palm oil producer, faces prospects of lower output growth in the commodity as strict entry rules and better job opportunities in top supplier Indonesia lead to a shortage of plantation workers.

Eight out of every 10 workers in the plantations sector is a non-Malaysian, according to the Malaysian Employer's Federation. A drop in foreign worker arrivals could further worsen a current labour shortage and lower output growth.

For a related story, see . Here are some questions and answers on how the labour shortage affects the palm oil industry:

WHAT IS THE IMPACT OF THE LABOUR SHORTAGE?

Fewer workers means harvesting rounds drop to once a month from twice a month for 10,000-hectare estates, potentially cutting output.

Palm oil output this year is expected to recover to 17.6 million tonnes from 17 million tonnes in 2010 and bumper yields could make this government forecast a reality. Planters say production could easily exceed the 2011 forecast by half a million tonnes if there were more harvesters.

WHAT DOES THIS DO TO COST OF PRODUCTION?

Dwindling labour and rising wages would push up the cost of producing palm oil that currently ranges between 700 ringgit to 1500 ringgit per tonne.

Sime Darby , the world's No.1 planter by land assets, will raise workers' salaries by 200 ringgit in July, bumping up its costs to 1,600 ringgit a tonne. This eats into profit margins, although companies still make money as palm oil KPOc3 is currently trading at around 3,200 ringgit per tonne.

Sime's move could prompt other palm oil firms to lift wages, although smaller planters may not have the economies of scale to ride out such increases.

HOW SERIOUS COULD THE LABOUR SHORTAGE GET?

At least 80 percent of Malaysia's oil palm estate workers are Indonesian Muslims and with Ramadan fasting month coming up in August, many go home and production tends to fall by at least 15 percent in that month.

A lot of them may not even return to Malaysia given the better opportunities in Indonesia, the world's top palm oil producer, where planters provide better wages and allow workers to bring their families.

Wages are comparable or even higher than Malaysia at 1,000-1,200 ringgit a month as companies expand acreage in Indonesia. In 2010, about 8 million hectares of land were planted with oil palms in Indonesia, compared to Malaysia's 4.9 million hectares.

Indonesian officials estimate in the past three years the palm oil sector has been adding at least 80,000 jobs annually, which heats up competition to retain labour between the two countries.

WHAT COULD MALAYSIA DO?

The industry has been in talks with the government to get longer and more flexible work permits for foreign labourers in Malaysia but nothing has been finalised as yet.

Malaysia issues five-year work permits to foreign workers, and after it expires, they are not allowed to work in the country for some time -- a ruling that pushes more labourers to return to Indonesia for good.

A long-term solution would be mechanise the harvesting process, although planters say the current crop of motorised sickles are too expensive and cannot reach the fruits on taller oil palms.

Malaysia could borrow an idea from Indonesia which requires plantation firms there to set aside and develop 20 percent of their land for small farmers -- who can eventually be a source of supply and labour.

But the number of farming families keen to make their living from the oil palm sector is fast dwindling as the work is seen as too labour intensive and low-class. Many smallholders in Malaysia prefer to hire Indonesian labourers instead. ($1 = 3.038 Ringgit)