28/02/2008 (NST Online) - Palm oil is riding high. The bullish mood is expected to prevail in the coming months. Prices have hit historic highs and show no sign of softening. At more than RM3,800 a tonne, profits have never been better.
Unlike in 1998, this time it has nothing to do with a falling ringgit. The ringgit is, in fact, appreciating against the greenback. It is, therefore, no wonder that plantation stocks are now the darling among investors. Some go so far as to say the current good fortunes of palm oil may be decisive in this general election!
Many reasons have been cited for the current high palm oil price. Rising demand from China and India is one factor. Tightening supply of global edible oils is another.
Some of the deficit may be attributed to much of the world production of edible oil ending up as feedstock for biofuel.
In the United States, much of their soya oil has been channelled for biodiesel, while much of their corn goes to bioethanol. The high crude oil price is expected to drive more edible oil into the biofuel market.
The big question now is: how long can this price bullishness last? Kuala Lumpur hosted Bursa Malaysia's annual Palm Oil Conference from Tuesday to yesterday, where experts were mostly of the opinion that palm oil prices may still climb in the coming months. Some are even saying that they may never again see the lows of the past. Some felt the price might soon breach RM4,000 a tonne.
We will just have to wait and see. In rural Malaysia, at least, palm oil smallholders are already enjoying the windfall from high prices.
Though price forecasting has always been prominent on the agenda of this meeting, this time around, the conference dwelt on issues concerning the sustainability of the palm oil business itself. How will palm oil cope with the new and more challenging demands of the knowledge and innovation economy?
The world is now entering an economic phase where consumers demand more transparency and accountability from businesses. The palm oil business is no exception.
Despite the present bull run, industry insiders know there are threatening undercurrents with the potential to derail the industry.
It is no longer to do with the nutrition issue, now past. Indeed, revelations of the dangers of trans-fats turned the tables in palm oil's favour. This is also why export of palm oil to the United States has risen in recent years.
The issue now is sustainability. The palm oil industry faces severe criticism from environmental groups worried about climate change, loss of biodiversity and environmental degradation. They claim that expanding oil palm cultivation might not only increase greenhouse gas emissions but also destroy the natural habitats of orang utans.
Palm oil-importing countries, especially those in the West, now insist on some kind of guarantee that the palm oil they import comes from sources with sustainable practices in their plantations and mills.
Under the roundtable for sustainable palm oil (RSPO) initiative, a group of key stakeholders in the palm oil trade is now working to set standards for sustainability.
It is still unclear whether the criteria are realistic for most oil palm growers, or whether producers who meet such criteria can enjoy some kind of premium in pricing. What is clear is that there are strong indications that those who fail to produce such "green" palm oil will not be allowed to export to some environmentally-sensitive markets.
Industry members worry about such requirements being imposed across all export destinations.
It will not be in the interest of the palm oil industry to completely ignore such demands. But such challenge is not new to the industry. Many believe the palm oil business will resolve the issue, given time. But the industry has to come to terms with another more pressing sustainability issue: human capital.
Lately, many plantation companies have faced problems recruiting people trained to work in estates and mills. Even the downstream business in palm oil has encountered difficulties. Not to mention the research and development institutions.
Since palm oil is a major contributor to the national coffers and an important provider of employment for the country, this human capital issue should be of concern to the government as well.
The time may be right for the industry to set up its own "plantation university", dedicated not only to training human capital for the industry but also undertaking R&D in the basic sciences to support the more applied R&D pursued by Malaysian Palm Oil Board and some palm oil companies.
Though the case for such a university is strong, not everyone in the industry supports the idea. But there is an urgent need to evaluate the pros and cons of the idea.
Palm oil will continue to be a major revenue earner for this country. It has the potential to contribute to the entire value chain of the innovation economy. What may turn out to be the Achilles heel of the industry is a lack of the right human capital.