influences upon palm oil production costs
TRANSCRIPT
©LMC International, 2015 1 25/09/15
Influences upon palm oil production costs
Presentation to the Fedepalma Congress, Cartagena de lndias, September 2015
by Dr James Fry, Chairman, LMC International www.LMC.co.uk
©LMC International, 2015 2 25/09/15
The key factors influencing production costs
I am going to try to cover a lot of ground today, since the influences on production costs are so many.
Among the more important I will review today are:
• Trends in yields and the impact of palm age profiles
• Labour productivity and fertiliser consumption
• Production costs, with and without by-product credits
• The recent sharp swings in exchange rates
©LMC International, 2015 4 25/09/15
You will be familiar with the yield of oil palms over their life cycle. We apply this profile to estimate average yields over the life time of all palm areas.
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0 4 8 12 16 20 24 28
% o
f ave
rage
yie
ld
Year after planting
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The yields over the lifetime of oil palm plantings we call “adjusted yields”. This adjustment raises Indonesian yields more than Malaysian yields.
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2.5
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2000 2002 2004 2006 2008 2010 2012 2014
Tonn
es o
f CPO
per
mat
ure
hect
are
Actual Malaysia Adjusted MalaysiaActual Indonesia Adjusted Indonesia
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The impact of the adjustments is revealed if we compare actual vs adjusted yields in high yielding Sabah and low yielding Sarawak in Malaysia.
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2.5
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2000 2002 2004 2006 2008 2010 2012 2014
Tonn
es o
f CPO
per
mat
ure
hect
are
Actual Sabah Actual SarawakAdjusted Sabah Adjusted Sarawak
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Yield adjustments are highest when a region has a high share of young trees. Colombia has a much higher immature share than other important areas.
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15%
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2008 2009 2010 2011 2012 2013 2014
Imm
atur
e %
Colombia Indonesia Malaysia Sarawak
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Here I have made a brave attempt to guess how yield adjustments for age would affect the CPO yield per mature hectare in Colombia.
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3.0
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2008 2009 2010 2011 2012 2013 2014
Tonn
es o
f CPO
per
mat
ure
hect
are
Actual Colombia Actual SarawakAdjusted Colombia Adjusted Sarawak
©LMC International, 2015 9 25/09/15
Be careful when comparing oil palm yields
Recorded CPO yields per mature hectare are highest in Malaysia, followed by Indonesia and Colombia .
In all three countries, the recorded yields have been flat or even declining since 2008.
However, the recorded yields fail to take account of the implications of the wave of new plantings made from 2007, which reduced the average age of mature areas.
For this reason, we at LMC now build up age profiles of oil palm areas by country, region or company to be able to estimate their underlying age-adjusted yields and deduce the impact on their production costs.
The next slide illustrates this for a big plantation group.
©LMC International, 2015 10 25/09/15
This company’s CPO yield in 2014 was 4.7 mt/ha. and its age-adjusted yield 4.4 mt/ha. Applying the adjusted yield, its cost rose from $267 to $290/mt.
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Normal Age adjusted
Age adjusted CPO yield (m
t/ha)Va
riabl
e pr
oduc
tion
cost
per
tonn
e of
CPO
Variable cost CPO Yield
©LMC International, 2015 12 25/09/15
Oil palm records much lower production costs per tonne of oil than annual oilseeds .... but only before one allows for by-product credits.
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Soybean Rapeseed Sunflower Palm
Oil
prod
uctio
n co
sts
befo
re c
redi
ts, $
/tonn
e
2000-2004 2005-2009 2010-2014
©LMC International, 2015 13 25/09/15
Soybean processors, in particular, have been enjoying high credits from the sale of their meal output. Oil palm credits from kernel are smaller.
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Soybean Rapeseed Sunflower Palm
Mea
l and
PK
cred
its, U
S$ p
er to
nne
of o
il
2000-2004 2005-2009 2010-2014
©LMC International, 2015 14 25/09/15
If you deduct by-product credits from production costs of oils (where land values are not included in field costs), soybean oil costs are now negative!
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Soybean Rapeseed Sunflower Palm
Oil
prod
uctio
n co
sts,
net
of c
redi
ts, $
/tonn
e
2000-2004 2005-2009 2010-2014
©LMC International, 2015 15 25/09/15
Real CPO production costs have risen with higher input costs, notably labour. Costs in 2010-2014 in Malaysia and Colombia were above 1985-1989.
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Colombia Indonesia MalaysiaReal
CPO
pro
duct
ion
cost
s, U
S$ p
er to
nne
1985-1989 1990-1994 1995-1999 2000-2004 2005-2009 2010-2014
©LMC International, 2015 16 25/09/15
The detailed data from the US reveal how much harder it has become for its soybean farmers to reduce their production inputs further.
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Fertliser Chemicals Fuel & Energy Labour Total
Annu
al c
hang
e in
ele
men
ts o
f US
field
cos
ts
1992-1994/ 1982-1984 2002-2004/ 1992-1994 2012-2014/ 2002-2004
©LMC International, 2015 17 25/09/15
Lowering production costs has become difficult
The annual oilseed crops have enjoyed a bonanza as a result of high by-product credits from the sale of meal, which are much more important per tonne of oil than oil palm’s credits from the sale of palm kernel.
Trends in production costs, before the deduction of by-product credits, seem to be pointing slowly upwards. Maybe this is due to complacency from high prices.
Input price rises have made things difficult for oil palm producers, with wages rising quite rapidly in South East Asia, for example.
I now turn to consider the impact of these inputs.
©LMC International, 2015 19 25/09/15
Malaysian and Indonesian costs of employing general field workers in US$ in 2014 were 320% and 380%, respectively, of their 2001 levels.
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Malaysia Indonesia
Gen
eral
labo
ur d
aily
cos
t to
em
ploy
er, U
S$
2001 2005 2009 2014
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In Malaysia, this has prompted an increase in the mature area per worker in recent years. However, part of this rise has been due to labour shortages.
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1950 1960 1970 1980 1990 2000 2010
Mal
aysi
a, to
tal m
atur
e he
ctar
es/w
orke
r
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Here I contrast the total area (both mature and immature) per worker in Malaysia and on estates in Indonesia, where the trend is at best flat.
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Hect
ares
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wor
ker
Indonesia Malaysia
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Fertiliser is also a crucial input. Here I plot not the price of fertilisers, but the fertiliser-CPO price ratio. One can understand why its use is now falling.
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Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15
Fert
ilise
r/CPO
Pric
e R
atio
200
0-20
14 =
100%
©LMC International, 2015 23 25/09/15
The impact of cutbacks in fertiliser use in reaction to high fertiliser prices may be seen in the year-on-year CPO growth cycle in Malaysia.
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1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Yr-o
n-yr
Mal
aysi
a ou
tput
cha
nge
©LMC International, 2015 24 25/09/15
Spending on inputs is set to fall significantly
The reduction in fertiliser use in response to the failure of fertiliser companies to reduce their prices will undoubtedly cut cash costs of CPO production and will hit output growth next year, compounding the effect of drought on oil palm yields.
In the case of labour costs, there have been two new developments: cutbacks in field maintenance and in the frequency of harvesting rounds; and (totally outside the control of the oil palm sector) the sharp devaluations of the currencies in many oil palm producing countries.
I conclude by examining the effect of currency turmoil.
©LMC International, 2015 26 25/09/15
Most oil palm producing countries have seen their exchange rates (local currency/US$) soar since 2012. Ecuador has been tied to the US$.
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Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15
Exch
ange
rate
inde
x, a
vera
ge 2
012
= 10
0
Malaysia Indonesia Colombia Brazil Ecuador
©LMC International, 2015 27 25/09/15
Devaluations have softened the impact of the fall in the world CPO price, when it is expressed in local currencies.
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Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15
Loca
l CPO
pric
e in
dex,
ave
rage
201
2 =
100
Malaysia Indonesia Colombia Brazil Ecuador
©LMC International, 2015 28 25/09/15
I end with the consumer view, showing how CPO prices have moved in local currency in importing countries. (Brent is a proxy for crude oil exporters)
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Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15
Exch
ange
rate
inde
x, a
vera
ge 2
012
= 10
0
US EU India Brent
©LMC International, 2015 29 25/09/15
Input cost reductions may help many palm producers to manage current low prices.
It seems highly unlikely that fertiliser prices will be able to withstand the pressures they face from falling sales, not just from oil palm producers but also from growers of annual crops whose prices have fallen back.
For those countries that have devalued substantially against the US$, these devaluations, until they feed through to inflation and pressure for higher wages, will lessen the immediate impact of low CPO prices.
Whatever happens, CPO production will respond in 2016 and help to raise CPO prices. However, a word of caution: don’t forget that higher prices will affect demand, both if soy oil becomes competitive and if biodiesel demand is reduced.
©LMC International, 2015 30 25/09/15
This presentation and its contents are to be held confidential by the client, and are not to be disclosed, in whole or in part, in any manner, to a third party without the prior written consent of LMC International.
While LMC has endeavoured to ensure the accuracy of the data, estimates and forecasts contained in this presentation, any decisions based on them (including those involving investment and planning) are at the client’s own risk.
LMC International can accept no liability regarding information analysis and forecasts contained in this presentation.
© LMC International, 2015 All rights reserved
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©LMC International, 2015 31 25/09/15
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