Oil Palm Growers May Profit Under Rainforest Accord

By Jeremy van Loon and Claire Leow



(Bloomberg) -- When United Nations climate negotiators meet next week in Mexico and debate protecting tropical rainforests, Golden Agri-Resources Ltd. and rival oil- palm growers in Southeast Asia will be paying attention.

Any UN-led accord that restricts clearing rainforest for planting more palm trees would limit the supply of the edible oil crushed from their fruit and be a boon to prices for growers, said Dorab Mistry, a director at oil trader Godrej International Ltd. More than 80 percent of the world’s palm oil comes from the rainforest nations of Malaysia and Indonesia.

“It’s a no-brainer that such exercises are bullish for prices,” said Mistry, who has traded edible oils for more than 30 years. Global supply of edible oils will fail to keep pace with demand for a third year, he said in an interview.

Palm oil climbed to a two-year high this year as more consumers and companies used the substance in cooking, detergents, cosmetics and biodiesel. The boom has helped destroy rainforests as growers expanded plantations of the 20-meter (66- foot) trees.

Because equatorial forests store more carbon dioxide than most other vegetation on earth, UN negotiators have said saving tropical trees is essential to a global effort to limit the man- made greenhouse gas linked to global warming.

Wilmar International Ltd., the world’s largest palm oil trader, as well as producers PT Astra Agro Lestari of Indonesia, Singapore-traded Golden Agri and Kuala Lumpur-based Sime Darby Bhd. operate in the regions that might benefit from a global agreement on tropical forestry protection.

Cancun Talks

Delegates from 194 countries who will meet at UN climate talks through Dec. 10 in Cancun, Mexico, are closer to drawing up an accord on tropical forests than on other issues, said Gerald Steindlegger, policy director for the forest carbon initiative in Vienna for environment group WWF.

Reducing emissions from deforestation and degradation, known as REDD, is “ripe for an agreement,” said Steindlegger, as delegates may want to highlight a breakthrough on deforestation as proof of success at the Mexican meeting.

Global forests contain an estimated 638 gigatons of carbon, more than all the carbon in the earth’s atmosphere, the UN Framework Convention on Climate Change, which sponsors the talks, said on its website. One gigaton is a billion tons.

Supplies of edible oils from soybeans, palms, coconuts, groundnuts, cotton, rapeseed and sunflower will rise by 3.5 million tons in the year to September 2011, while demand may rise as much as 5 million tons, Godrej’s Mistry said.

Palm oil has gained about 17 percent this year and closed on Nov. 23 at 3,115 Malaysian ringgit ($993) a metric ton in Kuala Lumpur, according Bloomberg data.

Supply Pinch

UN-sponsored limits on the use of forest land will likely put the brakes on expansion of the palm oil industry and fuel rising prices, said Carl Bek-Nielsen, vice chairman of Teluk Intan, Malaysia-based United Plantations Bhd.

“If more oil can’t be produced, then what is there will become more valuable,” Bek-Nielsen said in a Nov. 17 interview in London. “If someone could wave a magic wand and not a single tree would fall down in the next 20 years, food prices are going to explode.”

Limits to expansion are already under way. In Malaysia, growth will have to come from improving productivity because 58 percent of the country is forested and the government has a commitment to maintain at least half of all land as natural forest, Plantation Industries and Commodities Minister Bernard Dompok said on Nov. 17 in London.

“I do not see any further large-scale planting of oil palm in Malaysia,” Dompok said.

Raising Yields, Replanting

Analysts agree. Future growth for Golden-Agri, based in Singapore, will come from raising yields by replacing trees that have outlived their useful lives, said Ben Santoso, a plantation analyst at DBSVickers Securities (Singapore) Ltd. on Nov. 8.

Replanting reduces supply and supports prices because oil palms take three years to mature and produce oil, he added. Wetter weather than usual this year has hindered replanting groves in Indonesia and Malaysia and helped prop up prices.

With most of the world’s palm oil coming from Malaysia and Indonesia, destruction of their rainforests raised the ire of environmental and non-governmental organizations. One NGO, WWF, seeks to end deforestation and protect habitats of endangered species such as the orangutan and Sumatran rhinoceros.

“We want to plant as much as possible,” Kuok Khoon Hong, chief executive officer of Wilmar, said on Nov. 10. “Now with NGOs so active, it is difficult. In the past, you get the land and you start to plant. Now everything is slower as we need licenses.”

Tightening supplies and “inelastic demand” from countries including China will extend the “crazy” price rallies this year, Tao Chen, chairman of Louis Dreyfus Commodities (Beijing) Trading Co., said on Nov. 7.

Biodiesel Demand

Growers also want to meet demand for biodiesel, one of the few alternatives to fossil fuels that can power heavy trucks. The pressure to increase palm oil supply will rise because it’s suitable for biofuels, said James Fry, managing director of LMC International. The company studies the economics of edible oils and their meal residue, which can be used as livestock feed.

“Biofuel policies add to oil demand without lifting meal demand,” Fry said by e-mail. “Biofuels have tipped the market balance towards crops high in oil and low in meal. Oil palm is the ideal crop to meet the market’s new needs.”

Oil palms produce 8 tons of oil for each ton of meal, while soybeans produce 0.25 tons of oil per ton of meal, he said.

Amazon Destruction

About 2 percent of the 302,149 hectares of Amazon forest destroyed in Brazil’s states of Mato Grosso, Para and Rondonia can be attributed to soybean planting, a July survey commissioned by Brazil’s Environment Ministry and trading companies showed. The three states are the largest producers of the oilseed in the Amazon region.

To inhibit soybean planting in the Amazon, trading companies that handle about 90 percent of the crop in Brazil agreed to ban sales of the oilseed illegally grown in the rainforest. The agreement between companies, the Environment Ministry and non-government organizations was signed in 2006 and renewed each year since.

Restrictions on forest clearing are already being felt in Indonesia where the government in May agreed to a two-year moratorium on logging and clearing of forests, with $1 billion in aid from Norway.

Restricted expansion of oil palm plantations “will have profound implications for price behavior,” said Mistry, who correctly predicted in March that prices would exceed 3,000 ringgit ($962) a ton on supply constraints. “The world must be braced for much higher prices in the years to come.”

--With reporting by Alex Morales in London. Editors: Todd White, Reed Landberg, Peter Langan