KRI PRESS |
Jan 21, 2025
Bracing the future: Challenges facing Malaysia’s oil palm sector
Kuala Lumpur, 26 January 2021 – Malaysia’s oil palm industry is extremely vulnerable to labour shortages according to a study finding in Khazanah Research Institute’s (KRI) latest publication titled Implications of the Dominant Shift to Industrial Crops in Malaysia: System Dynamic Model of Industrial Crops. Based on simulations done, labour shortage is more detrimental than a global price drop to both estates and smallholders. A reduction of labour by 30% from the current level will see production reduced by half and a further of 80% will lead to a system collapse as production reaches only 20% from the Business As Usual (BAU) level.
“Therefore, a COVID-19 outbreak among the migrant workers in the oil palm estates, could prove detrimental. As such, industry players must be vigilant in ensuring the adherence to COVID-19 SOPs, improve workers' accommodation and adopt digitalisation to minimise menial processes," said Prof. Dr Datin Paduka Fatimah Mohamed Arshad, the lead author of the study and Visiting Senior Fellow of KRI.
The study also reveals that the nation is nearing its ceiling limit of 6.5 million hectares of oil palm land. In 2019, a total of 5.9 million hectares belongs to large estates, while 986,000 hectares (17%) belongs to smallholders. The study showed that development support for our smallholders yield higher impact to the smallholders particularly on their return per hectare compared to the estates.
Meanwhile, the replanting rate normally practiced by the oil palm sector is at 12%. Meaning, 12 new trees are typically planted per year for every 100 overmatured trees. However, our simulations showed that the optimal replanting fraction to give the best yield per hectare for an estate is 15%, and a smallholder at 17% instead of the usual 12%.
In a nutshell, to reduce the dependence on land there is a dire need for the oil palm industry to improve yield, expedite replanting, reduce non-labour input cost to increase production and revenue. Besides, developmental supports on the smallholders would yield higher return. Investments on the smallholders will create an inclusive growth, equitable distribution and hence sustainability of the oil palm sector.
The aim of this study is to identify the key policy interventions towards revitalisation of the agricultural sector using a system dynamics modelling tool. The specific objectives are to identify the structural and institutional factors and policies that drive the agricultural shift, identify factors that cause low productivity, to develop a system dynamics model to capture these relationships and to simulate alternative policy interventions.
“The study showed that the dominant shift to oil palm was driven by higher oil palm profits over rubber and cocoa,” explains Prof. Dr Fatimah.
Historically, Malaysia was once a world leader in cocoa and rubber production. However over time, there has been a dominant shift to oil palm. Currently, out of a total of 8 million hectares of agricultural land, 6 million hectares (74 %) is oil palm, with declining shares in the rubber and cocoa sector (14% and 2% respectively) with the food industry playing a smaller role (10% of agricultural land).
The study was led by Fatimah Mohamed Arshad together with Kusairi Mohd Noh, Nguyen Luong Bach, Illisriyani Ismail, Abdullah Ibragimov, Sarena Che Omar, Gregory Ho Wai Son, Siti Aiysyah Tumin and Ahmad Ashraf Ahmad Shaharudin.
To find out more about the book, visit KRI’s website at www.krinstitute.org for the full copy.
“Therefore, a COVID-19 outbreak among the migrant workers in the oil palm estates, could prove detrimental. As such, industry players must be vigilant in ensuring the adherence to COVID-19 SOPs, improve workers' accommodation and adopt digitalisation to minimise menial processes," said Prof. Dr Datin Paduka Fatimah Mohamed Arshad, the lead author of the study and Visiting Senior Fellow of KRI.
The study also reveals that the nation is nearing its ceiling limit of 6.5 million hectares of oil palm land. In 2019, a total of 5.9 million hectares belongs to large estates, while 986,000 hectares (17%) belongs to smallholders. The study showed that development support for our smallholders yield higher impact to the smallholders particularly on their return per hectare compared to the estates.
Meanwhile, the replanting rate normally practiced by the oil palm sector is at 12%. Meaning, 12 new trees are typically planted per year for every 100 overmatured trees. However, our simulations showed that the optimal replanting fraction to give the best yield per hectare for an estate is 15%, and a smallholder at 17% instead of the usual 12%.
In a nutshell, to reduce the dependence on land there is a dire need for the oil palm industry to improve yield, expedite replanting, reduce non-labour input cost to increase production and revenue. Besides, developmental supports on the smallholders would yield higher return. Investments on the smallholders will create an inclusive growth, equitable distribution and hence sustainability of the oil palm sector.
The aim of this study is to identify the key policy interventions towards revitalisation of the agricultural sector using a system dynamics modelling tool. The specific objectives are to identify the structural and institutional factors and policies that drive the agricultural shift, identify factors that cause low productivity, to develop a system dynamics model to capture these relationships and to simulate alternative policy interventions.
“The study showed that the dominant shift to oil palm was driven by higher oil palm profits over rubber and cocoa,” explains Prof. Dr Fatimah.
Historically, Malaysia was once a world leader in cocoa and rubber production. However over time, there has been a dominant shift to oil palm. Currently, out of a total of 8 million hectares of agricultural land, 6 million hectares (74 %) is oil palm, with declining shares in the rubber and cocoa sector (14% and 2% respectively) with the food industry playing a smaller role (10% of agricultural land).
The study was led by Fatimah Mohamed Arshad together with Kusairi Mohd Noh, Nguyen Luong Bach, Illisriyani Ismail, Abdullah Ibragimov, Sarena Che Omar, Gregory Ho Wai Son, Siti Aiysyah Tumin and Ahmad Ashraf Ahmad Shaharudin.
To find out more about the book, visit KRI’s website at www.krinstitute.org for the full copy.
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