James Fry 2017 PDF

Can productivity grow in step with demand?
Presentation to IPOC 2018

by Dr. James Fry, Chair, LMC International, Oxford, UK
Nusa Dua, November 2017
© 2017 LMC International. All rights reserved. www.Lmc.co.uk
Can productivity grow in step with demand?
This session is entitled “Increasing Productivity through Intensification and
Efficiency” which is obviously a big topic. Therefore, I agreed with the IPOC
organisers to focus on the following question:
• Is it possible, in practice, for productivity growth to keep pace with the

growth in demand for oils and therefore to remove the need for new areas
to be planted to oil crops?
However, I know that you also want me to present my latest thoughts about
the outlook for palm oil output, stocks and prices. Accordingly, I will do my best
to answer these four questions at this conference today:
1. In view of the stuttering recovery from the mega-El Niño, what is the
outlook for production growth in the next year or so?
2. What does this mean for palm oil stocks?
3. Is the price band still valid?
4. What are the implications for CPO prices?
© 2017 LMC International. All rights reserved. Long term prospects for palm oil output
The trends in the productivity of oil crops
The growth in oil palm yields per hectare:

A worrying failure to keep up with other crops
© 2017 LMC International. All rights reserved. Long term prospects for palm oil output 3
Growth in CPO yields/hectare stopped about 10 years ago
As young estates became mature and fertiliser use recovered after the Asian
financial crisis, CPO yields soared, but they have not moved ahead since 2007.
4.5
Yield, tonnes of CPO per hectare
4.0
3.5
3.0
2.5
2.0
1990 1995 2000 2005 2010 2015
Malaysia Indonesia
Palm lags behind other major crops in its growth in yields
In view of El Niño, the end-date for palm oil here is 2015. (Also remember that GM
research has so far been mainly about cost reduction, rather than yield increases.)
2.0%
Annual growth in world yields
1.5%
1.0%
0.5%
0.0%
-0.5%
Soybean Rapeseed Maize Palm Oil
1980-2016 (2015 for palm) 2007-2016 (2015 for palm)
The trends in oil palm yields are extremely disappointing
There can be no doubt that the failure to increase the average yields
of oil palm is a real concern to the palm sector.
There are several possible explanations. One suggestion I hear is
that area growth is concentrated in marginal areas, but this proves to
be only a minor factor when I have studied the Malaysian data.
Another is that producers are unwilling to pay a price for seeds that
rewards research properly. $200/hectare for a tree to last 25 years is
tiny in relation to the benefits from higher yields. While oil palm yield
growth has halted, crops (including soybeans and rapeseed) with big
investments in seed research regularly achieve growth of 1%-2%.
The problem of disappointing yield trends is magnified by the
growing difficulty of attracting labour to estates. Mechanisation will
eventually help, but this will take time and it will require substantial
investment in research and in new agricultural machinery.
The trends in past plantings of oil crops
The growth in the areas planted to oil crops:

Productivity has failed to keep up with demand
The area under oil crops has grown steadily for 50 years
Grain areas fell in 1980-2000 as yields grew faster than demand; then US ethanol
took off. Oil crop areas kept rising, since demand outstripped productivity growth.
700 180
680 160
Grain Area (million hectares)
Oilseeds Area (million hectares)

660 140
640 120
620 100
600 80
580 60
560 40
540 20
1965/66 1975/76 1985/86 1995/96 2005/06 2015/16
Grains Oilseeds
All oil crop areas have risen, including, of course, oil palm
Despite its rapid growth for decades, the global area under oil palm remains the
smallest of the areas planted to the four main oil crops. Soy dominates growth.
120
Harvested areas, million hectares
100
80
60
40
20
0
1961 1971 1981 1991 2001 2011
Soybeans Sunflower Rapeseed Oil palm
World demand growth for oils exceeds that for meal
In the background, because growth in oil demand has moved ahead of that for
oilseed meals, the world needs a rising share of high oil crops (such as palm).
360 180
Meal (million tonnes, soymeal equivalent)
320 160
280 140
Oil (million tonnes)

240 120
200 100
160 80
120 60
80 40
40 20
0 0
1972 1978 1984 1990 1996 2002 2008 2014
Meals Oils Real World GDP, as Index
Oil crop productivity has failed to keep pace with demand
Because the growth in the yield of oil crops has not managed to
keep pace with the growth in worldwide demand for their oil and
meal, the areas planted to each of the oil crops have risen
steadily for decades, even before the arrival of biofuels.
All oil crops shared in the growth in plantings, but thanks to the
surge in the production of biodiesel, global demand growth for oil
products has tilted increasingly towards oils, rather than meals,
and this naturally favours the high oil crops, among which oil
palm is the best example.
Unfortunately, oil palm, which is by far the most productive crop
in its oil yields per hectare, has failed to achieve any underlying
growth in its yields in either Indonesia or Malaysia, over the past
decade, even if one excludes the most recent El Niño period.
The trends in the demand for oils
The growth in the demand by end-use:

Will it keep on growing fast, or will it slow?
Demand per head for oils for food rises steadily with income
Across a wide sample of countries, food demand for oils per capita increases in
parallel with the increases in per capita Gross Domestic Product.
35
Per Capita Food Oil Consumption (kg/year)
30
Malaysia
25
Indonesia
20
15
10
0 5 10 15 20
Per Capita GDP ('000 US$/year)
Biofuels lead the slowdown in world demand growth for oils
The annual rates of growth in demand for oils will be reduced for all end-uses,
but most notably for biofuels. Overall growth will still exceed 3% in 2017-2030.
16%
14%
Annual growth in oils demand, %
12%
10%
8%
6%
4%
2%
0%
Food Biofuels Other Industrial Total
2000-2010 2010-2017 2017-2030
Our question: Can productivity grow in step with demand?
The answer is clearly a resounding “no”.
Historically, the areas under oil crops grew year on year, because the
increases in yields failed to keep up with the growth in demand.
There is no reason to believe that this will change. With population growth to
be added to per capita demand growth, it would need productivity to increase
by over 3.5% per annum over the next 15 years to avoid the need for more
land to be planted to oil crops.
The problem will be magnified by the moratorium and other pressures to
minimise any increase in the areas planted to oil palm.
This will force annual oilseed crops, and the most obvious candidate is
soybeans, to expand their areas very considerably indeed to make up for
slowdown in oil palm plantings.
I say this because for every hectare that is ”lost” to oil palm (with 4 tonnes of
oil), it will require, on average, eight hectares to be “added” to soybean areas
(yielding 0.5 tonnes of oil per hectare) to keep vegetable oil supply on track.
The outlook for palm oil output growth
The impact of the El Niño on palm oil output
The recovery in output after El Niño has been erratic
There has been a stop-start revival in production after the severe shock in 2016
2
Yr on yr change in output, million tonnes
-1
Current period of slower output growth

-2
-3
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2016 2017 2018
Indonesia Malaysia
Rolling 12 month year-on-year output growth is now high
Slow output growth in the second half of this year is reflected in the temporary
decrease in year-on-year growth before a return to a rise of 6 million tonnes.
8
Annual change in output, million tonnes
-2
-4
-6
-8
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2016 2017 2018
Indonesia Malaysia
The outlook for palm oil prices
Forecasting palm oil stocks and prices
2007 heralded the creation of a price band in which EU
vegetable oil prices trade at a premium to Brent crude oil
You can see that whenever, since 2007, EU CPO prices fell and touched Brent
crude oil prices, they bounced back. Brent is now an effective floor.to CPO prices
2,100
1,800
EU prtices (US$ per tonne)
1,500
1,200
900
600
300
0
Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17
Soy Oil CPO Rapeseed Oil Sun Oil Brent
There is a link between stocks and the CPO-Brent spread
When Malaysian stocks are high, downward pressure on prices cuts the EU CPO
premium over Brent. When stocks are low, the premium rises to ration demand.
600 3,050
EU premium over Brent, US$ per tonne
500 2,800
MPOB Palm Oil Stocks, '000 tonnes

400 2,550
300 2,300
200 2,050
100 1,800
0 1,550
-100 1,300
Jan-08 Jul-09 Jan-11 Jul-12 Jan-14 Jul-15 Jan-17
EU CPO Premium over Brent Average CPO Premium MPOB Stocks
Rising stocks are putting pressure on the CPO-Brent spread
Daily local CPO premia in Indonesia and Malaysia over Brent have shrunk to a
2017 low, but have been overlooked because of the recent rise in the Brent price.
350
Premium over Brent crude, US$ per tonne
330
310
290
270
250
230
210
190
170
Jan Feb Mar Apr May Jun Aug Sep Oct
Indonesia FOB minus export levy Malaysia local delivered CPO
MPOB stocks will rise, fall and then rebound quickly.
Stocks should peak this month; fall back as output drops on a seasonal basis; but
recover rapidly in Q2. The CPO-Brent spread should move in the opposite direction.
800 3,000
EU premium over Brent , US$ per tonne
700 2,800

600 2,600
500 2,400
400 2,200
300 2,000
200 1,800
100 1,600
0 1,400
-100 1,200
Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
EU CPO Premium over Brent Average Premium MPOB Stocks
MPOB stocks will rise, fall and then rebound quickly.
Stocks should peak this month; fall back as output drops on a seasonal basis; but
recover rapidly in Q2. The CPO-Brent spread should move in the opposite direction.
800 3,000
EU premium over Brent , US$ per tonne
700 2,800

600 2,600
500 2,400
400 2,200
300 2,000
200 1,800
100 1,600
0 1,400
-100 1,200
Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
EU CPO Premium over Brent Average Premium MPOB Stocks
Implications for EU CPO prices at different Brent prices
I illustrate EU CPO price forecasts until July at different Brent crude oil prices
alongside MPOB stocks. The price yesterday evening was just over $60 per barrel
800 2,400
EU price, US$ per tonne
750 2,200
MPOB stocks, '000 tonnes

700 2,000
650 1,800
600 1,600
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
$65/bbl Brent $60/bbl Brent $55/bbl Brent Stocks
Implications for BMD futures at different Brent prices
This expresses price forecasts in Ringgits. Yesterday BMD was just over RM2,800
3,000 2,400
BMD CPO, Ringgits per tonne
2,800 2,200
MPOB stocks, '000 tonnes

2,600 2,000
2,400 1,800
2,200 1,600
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
$65/bbl Brent $60/bbl Brent $55/bbl Brent Stocks
Brent crude and the outlook for CPO prices
The Brent crude price averaged $48/bbl in July, $52 in August and
$56 in September and October. Yesterday it was just over $60.
Brent is pulled between Saudi Arabia’s desire to raise values before
the huge Aramco IPO and US shale oil’s response to higher prices.
That is why I have plotted CPO prices at three levels of Brent prices.
If you think the Saudis will hold sway, at least until Q2, CPO futures
peak at RM2,950 in January and then fall back towards RM2,600.
At $60 Brent, prices peak at over RM2,800, before falling back to a
level below RM2,500.
At $55 Brent, BMD falls below today’s quotations towards RM2,300.
To put these forecasts into perspective, July 2018 will be the first
month in which the EU CPO-Brent spread would be below the long
run average of $230-$240 per tonne.
Thank you for your attention
Oxford New York Kuala Lumpur
4th Floor, Clarendon House 1841 Broadway SO-30-8
52 Cornmarket Street New York, NY 10023 Menara 1
Oxford USA No3 Jalan Bangsar
OX1 3HJ KL Eco City
UK 59200 Kuala Lumpur
Malaysia
T +44 1865 791737 T +1 (212) 586-2427 T +603 5611 9337
F +44 1865 791739 F +1 (212) 397-4756
info@lmc.co.uk info@lmc-ny.com info@lmc-kl.com
www.Lmc.co.uk
© LMC International, 2017

All rights reserved
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.

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Can productivity grow in step with demand?

Presentation to IPOC 2018

• Is it possible, in practice, for productivity growth to keep pace with the

The growth in oil palm yields per hectare:

The growth in the areas planted to oil crops:

Oilseeds Area (million hectares)

Oil (million tonnes)

The growth in the demand by end-use:

The impact of the El Niño on palm oil output

Current period of slower output growth

Forecasting palm oil stocks and prices

MPOB Palm Oil Stocks, '000 tonnes

MPOB Palm Oil Stocks, '000 tonnes

MPOB Palm Oil Stocks, '000 tonnes

MPOB stocks, '000 tonnes

MPOB stocks, '000 tonnes

© LMC International, 2017

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