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Business Environment: Palm Oil in Indonesia

In: Business and Management

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Words 2079
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Saurav Goswami (ABM08012)
Saurav Goswami (ABM08012)

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ABE-II Assignment
Submitted to: Prof. M.K Awasthi
ABE-II Assignment
Submitted to: Prof. M.K Awasthi

Table of Contents Introduction 2 History of Palm Oil 2 History of Palm Oil in Malaysia 2 Importance of Palm Oil in the World 3 Analysis of Economic Environment 5 Supply-Side Environment 5 Demand Side Environment 7 Palm Oil Economy in Malaysia 7 Key Inferences 8 Analysis of Political, Legal & Institutional Environment 8 FELDA, FELCRA & RISDA 9 Government Policies 9 Analysis of Social & Environmental Impact 11 Analysis of Technological Environment 12 Skills & Knowledge Development 12 Research & Development 12 Overview of Business Environment & Conclusions 13

Introduction
History of Palm Oil
The oil palm tree (Elaeis Guineensis Jacq.) is said to have originated in West Africa, somewhere between Angola and Senegal. The earliest archaeological evidence of palm oil has been found in an Egyptian Tomb in Abydos. These two facts point to two inferences. One, that palm oil production was happening even 5000 years ago. Secondly, as no palm oil was produced in Egypt, this means that Palm Oil trading also was prevalent at that time. Thus, Palm Oil has been used by mankind since historical times. A basic description of the palm oil extraction process is shown below:
(Source: Malaysian Oil Palm Publication Annual Report 2011)
History of Palm Oil in Malaysia
Palm Oil was introduced in Malaysia by in 1910 by Scotsman William Sime and English banker Henry Darby as a plantation crop, as Malaysia was a British Colony at the time. The plantations operated by British plantation owners until the Malaysian government engineered their ‘Malaysian-isation’ throughout the 1960s and 1970s. After gaining independence in 1957, the Malaysian Government focused on rubber plantations to boost exports, and on alleviating poverty through land schemes. In the 1960s and 1970s, the world prices of rubber plunged and the Malaysian Government started encouraging the establishment of other plantation crops. Thus, Palm Oil Plantations were majorly promoted.
FELDA (Federal Land Development Authority) was formed on July 1, 1956 the Land Development Act of Malaysia took effect, with the main aim of eradicating poverty. In 1961, FELDA's first oil palm settlement opened, with 3.75 km² of land. As of 2000, 6855.2 km² (approximately 76%) of the land under FELDA's programmes were devoted to Palm Plantations. By 2008, FELDA's resettlement broadened to 112,635 families, who work on 8533.13 km² of agriculture land throughout Malaysia. Oil palm planting took up 84% of the land under FELDA. Today, FELDA is the world's biggest oil palm planter, with planted area close to 900,000 hectares in Malaysia and Indonesia.
As FELDA was considered to be a success, other such schemes were launched to assist the development of rural communities by supporting small scale cultivation of high-yield cash crops such as palm oil. Chief among these were the Federal Land Consolidation & Rehabilitation Authority (FELCRA) was established in 1966 and the Sarawak Land Consolidation and Rehabilitation Authority (SALCRA) formed in 1976. As of November 2011, SALCRA had developed 18 estates totalling approximately 51,000 hectares.
Thus, Palm Oil is seen in Malaysia as an important tool of poverty alleviation and has significant socio-economic importance.
Importance of Palm Oil in the World
As of 2012, Palm Oil comprises of 40% of the world’s trade in edible oils. It is used in one out of ten food products worldwide. A snapshot of the palm oil value chain and its uses is presented below:
(Source: MPOC Publications: USDA Database)

As can be seen, the non-food use of Palm Oil has been happening and increasing since 1995. This is due to its use in Bio-Diesel, which has increased the demand of palm oil even further.
Palm Oil has also been called a ‘Miracle Oil’ due to its multiple uses, health benefits, high yield as compared to other oilseeds, 25 year productive cycle and low cost of production. A snapshot of its benefits is presented below. Due to its high level of benefits, it is seen as a key crop for the future in meeting world food demands, and is thus a focus area for all governments of countries where it is produced.
(Source: American Heart Association)

The global demand for palm oil is expected to grow from the current level of 22 million tonnes per annum to approximately 40 million tonnes per annum, according to according to a study by WWF. The interesting inference about the previous fact was that the study was conducted by WWF. This was because Palm Oil Plantations have had a tremendous environmental impact in Malaysia and Indonesia, where 77% of the world’s palm oil supply was generated. It has been responsible for large scale deforestation as well as loss of biodiversity in these areas. Thus, the socio-economic benefits of palm oil have to be balanced out with environmental impact by focusing on sustainable palm oil plantations to meet this demand in the future.
As sustainability became a key issue, the Roundtable on Sustainable Palm Oil (RSPO) was established in 2004 with the objective of promoting the growth and use of sustainable oil palm products through credible global standards and engagement of stakeholders.
As per the RSPO website, “The RSPO is a not-for-profit, market-led association that represents stakeholders from seven sectors of the palm oil industry - oil palm producers, palm oil processors or traders, consumer goods manufacturers, retailers, banks and investors, environmental or nature conservation NGOs and social or developmental NGOs - to develop and implement global standards for sustainable palm oil”.
Analysis of Economic Environment
Supply-Side Environment
Palm Oil production has been increasing at a rapid rate and eating into the production of all other oilseeds since the 1990s.
As can be seen from Table-I below, global share of production in oils has increased from 20% in 1992 to 30% in 2005, while other oils have remained stagnant or decreased. Also note that the overall production itself has nearly doubled during this period. Hence, overall growth in all oilseeds is impressive, while growth of palm oil is particular is overwhelming.
As seen from Table-II given below, it is highly export oriented as production takes place mainly in Indonesia and Malaysia who grow it in plantations specifically for the global demand, which has hugely positively impacted their national income. This has occurred mainly due to the various uses mentioned earlier as well as its characteristics of low production cost and high social impact of poverty alleviation.

As seen from Table-III, it is preferred to other oilseeds due to its significantly higher yield.

As seen from the figure below, almost 77% of the world’s total area under cultivation of palm oil is in Malaysia and Indonesia. Thus, the world is heavily dependent on these two countries for its supply
(Source: Oilworld Database, June 2008)
As seen from the figure below, Palm Oil is also the cheapest among all major edible oils. This can be attributed to the large supply, which in turn is due to the high yield, multiple uses and health benefits.
(Source: www.fao.org/worldfoodsituation/FoodPricesIndex)
Demand Side Environment

The chief importers of Palm Oil include India, China, EU-27 and Pakistan. The Indian Subcontinent and China enjoy a geographical proximity to the main producers, and thus are its major customers.
Palm Oil Economy in Malaysia
The palm oil industry is Malaysia’s fourth largest contributor to the national economy and currently accounts for 8% of the per capita GNI.
As can be inferred from the two figures below, the palm oil industry has defied all recessions and downturns to have a continuous increase in production. The following are the key inferences drawn from the two figures: * The Malaysian GDP Growth Rate (Green Line) has gone through several recessions. The reasons for the recessions have been indicated on the figure itself. * The prices of Crude Palm Oil (CPO) have a cyclical nature, which is more pronounced since 1994-95. Additionally, it seems independent of the Malaysian GDP cycle with an inverse impact in 1998, and a parallel behaviour since then. * The exports of Palm Oil from Malaysia has been continuously increasing due to the high global demand and oil being an essential ingredient of food demand, which has risen continuously due to increasing world population. However, limited land bank has slowed down growth recently.
(Source: MPOB website, OECD Financial Indicators database )

Key Inferences * High Relative Demand and Growth over all Edible Oils * Highest Yield among all Oilseeds * Limited land for expansion in Malaysia slowing down growth
Analysis of Political, Legal & Institutional Environment
As Palm Oil is extremely important to Malaysia for a social standpoint, there are multiple institutions that play a role in the industry. As can be seen from the figure below, there is a diverse set of institutions impacting the business environment of Palm Oil in Malaysia. A few select stake-holder institutions have been studied along with government policies impacting the industry.

FELDA, FELCRA & RISDA
As described earlier in this report, these institutions were set up to support palm oil production by the rural population of Malaysia and for poverty eradication by participation in the cash crop economy. The following presents a snapshot of the FELDA success story, its aims and impacts.
(Source: FELDA Website)
Government Policies

The Government Policies are currently oriented towards export diversification of Palm Oil between Crude Oil and Value-Added Products. There are combinations of Taxation Policies and Incentive Schemes aimed at promoting the same. The key policies have been mention in the figure above. Additionally, the Key Government Support Institutions are:
1. MITI – Ministry of International Trade & Industry
2. SIRIM – Standards & Industrial Research Institute of Malaysia
3. MPOPC - Malaysian Palm Oil Promotion Council
4. PORLA – Palm Oil Registration & Licensing Authority
5. PORIM – Palm Oil Research Institute Malaysia

Strong and Efficient Coordination between the industry and these institutions have positively impacted the Palm Oil industry. The positive impact can be seen from the increasing production and social impact on the Malaysian rural population.

The impacts and focus areas of the Industrial Master Plan’s for Palm Oil in Malaysia are as follows:

Analysis of Social & Environmental Impact
The Social Impact of the Palm Oil industry has been enormous with positive effects on the rural poor and their participation in the cash crop economy. At the same time, there has been a huge impact on the environment due to the plantations. The positive and negative impacts of Palm Oil in Malaysia have been presented in the table below:

To promote sustainable development of Palm Oil in Malaysia, the Roundtable on Sustainable Palm Oil (RSPO) was established in 2004 with the objective of promoting the growth and use of sustainable oil palm products through credible global standards and engagement of stakeholders. RSPO came out with a set of requirements for being classified as a sustainability compliant estate in 2007. The following moves were implemented to ensure compliance by plantation estates: * Subsidies to smallholders to obtain RSPO certification * Government policies on land conversion * Oil palm in Malaysia can only be planted on idle land or designated agriculture land * Private sector and government agencies should highlight existing sustainable practices * Zero-burning replanting technique * Biological control in weed control, pest control * Highlight policies on planting on peat soil conditions

Analysis of Technological Environment
Skills & Knowledge Development

Research & Development

Overview of Business Environment & Conclusions

Malaysia today is the leading hub of palm oil production, trade and knowledge. The palm oil industry is a profitable business that provides opportunities to diversify into both food and non-food products. The industry has withstood several economic recessions without being affected majorly.
This has been possible due to the following reasons: * Suitable soil and agronomic conditions * Good infrastructure support in place * Availability of good planting material * Knowledge in plantation management and best practices * Integration with modern milling and mechanisation processes * Marketing capabilities & Quality control * Access to R&D competencies for sustained development
The following are to be kept in mind for future growth in this industry: * Environmental Impact Assessment and Sustainability * Network cohesion and sharing of information between * Government and plantation sector * Government to government * Plantation sector and stakeholders

--------------------------------------------
[ 1 ]. (Simeh, Arif & Tengku Ahmad, Tengku Mohd. Ariff (2001). "The Case Study on the Malaysian Palm Oil")
[ 2 ]. Source: LMC – Oilseeds Outlook for Profitability to 2020 (Jan 2009), USDA Database – April 2009

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