Malaysia :  Near Normal Rainfall Supports Palm Oil Output

Malaysia’s national average rainfall in the third quarter of 2005 was slightly above normal.  From July to September it was 214 millimeters per month compared to a normal of 200 millimeters.  This level of rainfall is favorable for production that will occur in the second quarter of 2006.  During the last 10 quarters, 6 quarters had below normal rainfall and 4 quarters above normal rainfall.  Overall, this is expected to be moderately detrimental to palm oil yields for the next six quarters.  The delayed effect of rainfall will be slightly positive from October 2005 to June 2006, and slightly negative from July 2006 to March 2007.

The Malaysian rainfall regression model (MRRM) forecasts yield for marketing year 2005/06 (Oct. 2005 – Sept. 2006) at 3.87 tons per hectare.  This is below the 20 year trend of 4.07 tons but above the 20-yr average of 3.70 tons.  The MRRM forecast is probably below a reasonable estimate because the model does not adequately take into account that yields in recent years have been increasing rapidly.  A reasonable way to interpret the MRRM model would be that it suggests that slightly above trend yield should be expected.  The 10-year trend yield is 4.33 tons per hectare. 

If one takes the MRRM forecast yield level and multiplies it by an estimated harvested area of 3.60 million hectares, output is forecast at 13.9 million tons for 2005/06.  This is below the official November USDA estimate of 15.5 million metric tons which corresponds to a yield of 4.30 tons per hectare using the same 3.60 million hectare area estimate.

Stable prices over the last year continue to support production in Malaysia.  The monthly average crude palm oil (CPO) price dropped from RM 1,460 (US$1.00=RM3.80) in October 2004 to RM 1,299 for February 2005 when palm oil yields greatly exceeded expectations, but the price recovered quickly and CPO has traded close to RM 1,400 from March to October. (See Attache Report MY5045, “Oilseeds and Products Update.”)

Biofuel is generating a great deal of enthusiasm in the palm oil industry.  With talk of high petroleum prices, environmental pollution and depleting fossil fuel reserves, Malaysian palm oil producers see huge opportunities to transform palm oil to biofuel and do not want to miss out on the predicted huge export markets.  The Malaysian Palm Oil Board (MPOB) has announced plans to build the country’s first biofuel plant in partnership with a private plantation company.  Scheduled to come on line in October 2006, it would have an annual production capacity to process 60,000 tons of refined palm olein into biofuel.  The MPOB expects at least five more plants to be established during the next two years.  At the recent international palm oil conference, the Malaysian Minister of Plantation Industries and Commodities announced that 3 biofuel plants are to be built.  Europe is the targeted market due to its regulation with the objective that usage of renewable fuels reach 5.75 percent of total energy use by 2010.  The production cost of palm oil is said to be about 40 percent lower than for other biofuel feedstocks.  The Malaysian government is drafting a national biofuel policy and hopes to submit it to Parliament in 2006.

Note: The MRRM linear regression model uses rainfall lagged 3 quarters, 1-year cumulative rainfall lagged 6 quarters, and time as independent variables regressed against yield.  Because of the characteristics of linear regression, the model continues to increase projected yields even as rainfall becomes excessive; thus, the model tends to overstate yield when average monthly rainfall lagged 3 quarters is above 300 mm, and understate yield when rainfall is optimal.  A variety of information sources are used in determining official USDA estimates for Malaysian palm oil.

Oil palm production potential is reduced when trees are exposed to stressful conditions.  Low moisture is the most common stressful condition oil palm faces, so monitoring rainfall is useful in predicting palm oil yield levels.  The most critical periods for oil palm are 24 months, 18 months, and 6 months prior to maturation of the fruit bunches.  Twenty-four months before fruit maturity is when sex selection of the flowers occurs.  If oil palm trees are subjected to stress at this critical time, a higher proportion of the flowers become male flowers, which do not become fruit.  Eighteen months before fruit maturity is the time of floral abortion.  If oil palm trees are subjected to stress at this critical time, fewer flowers develop so a smaller number of fruit is produced.  Six months before fruit maturity is the time of pollination.  If oil palm is subjected to stress at this critical time, less pollination occurs, and a smaller number of fruit is produced.