MALAYSIA: Obstacles May Reduce Future Palm Oil Production Growth

For the past 30 years Malaysia has been a world leader regarding organizing an efficient and highly productive commercial 

oil palm plantation sector, as well as in pioneering important agricultural research and varietal development that benefited 

palm oil producers throughout the region. As a result of the coordinated efforts of government and commercial companies 

over this extended period (1979-2010), Malaysian palm oil production increased roughly 600 percent 

percent growth per annum. Malaysia was the world’s leading producer and supplier of palm oil and its various by

for much of this period, only recently being eclipsed by its neighbor Indonesia. The strength and continuity of the 3 

decades-long growth cycle was a remarkable achiev

pool of skilled immigrant labor, and extensive land areas suitable for conversion to plantations. 

However, in the last couple of years it has become apparent that the era of rapid growt

variety of physical obstacles and government policies have begun to weigh on the palm oil industry’s productivity. As a 

result, the prospect of stagnating future output from the world’s second largest palm oil producer may be

unavoidable. This outcome would be a real concern to the international edible oil market, given there are few if any other 

nations in the short-term which are capable of adequately boosting supply.

Annual global palm oil demand has increased at 

supplying nearly 30 percent of the increase in production required to meet this demand. Indonesia has supplied 62 

percent. Other countries supplied the remaining 8 percent. With intens

government to halt or slow its own oil palm plantation expansion owing to international environmental and greenhouse 

gas concerns, the prospect of stagnating Malaysian production substantially increases th

prices in the edible oil market. Since palm oil is the world’s cheapest edible oil, it has become the primary cooking oil for

the majority of people in the developing world of Asia, Africa, and the Middle East. The consumer b

large, growing, poor, and highly price-sensitive. Given there are currently no viable and affordable alternatives to palm oil 

for most of these consumers, any significant reduction in the growth rate of Malaysian production will mak

them to increase the use of edible oils in their diets.

Declining Availability of New Lands

Malaysian palm oil companies have engineered a sustained long

hectares since 1980 or 385 percent. Much of this development has been at the expense of native tropical forest, with 

national forest cover in core palm oil producing areas declining dramatically over the same period. In 2010 the 

government estimated that approximately 58 percent of the total national land area remained forested, and that its official 

policy is to keep 50 percent of the country forested in perpetuity. Therefore, time and land availability is quickly running 

out for the palm oil industry. The reality is that virtually all highly suitable areas have already been developed, and that 

even marginal land is now becoming scarce. T

MALAYSIA: Obstacles May Reduce Future Palm Oil Production Growth

For the past 30 years Malaysia has been a world leader regarding organizing an efficient and highly productive commercial 

oil palm plantation sector, as well as in pioneering important agricultural research and varietal development that benefited 

producers throughout the region. As a result of the coordinated efforts of government and commercial companies 

2010), Malaysian palm oil production increased roughly 600 percent 

ia was the world’s leading producer and supplier of palm oil and its various by

for much of this period, only recently being eclipsed by its neighbor Indonesia. The strength and continuity of the 3 

long growth cycle was a remarkable achievement, being a product of substantial financial investment, a large 

pool of skilled immigrant labor, and extensive land areas suitable for conversion to plantations. 

However, in the last couple of years it has become apparent that the era of rapid growth may be coming to an end as a 

variety of physical obstacles and government policies have begun to weigh on the palm oil industry’s productivity. As a 

result, the prospect of stagnating future output from the world’s second largest palm oil producer may be

unavoidable. This outcome would be a real concern to the international edible oil market, given there are few if any other 

term which are capable of adequately boosting supply.

Annual global palm oil demand has increased at roughly 2.3 million tons per year over the past 10 years, with Malaysia 

supplying nearly 30 percent of the increase in production required to meet this demand. Indonesia has supplied 62 

percent. Other countries supplied the remaining 8 percent. With intense pressure being brought to bear on the Indonesian 

government to halt or slow its own oil palm plantation expansion owing to international environmental and greenhouse 

gas concerns, the prospect of stagnating Malaysian production substantially increases the likelihood of sustained high 

prices in the edible oil market. Since palm oil is the world’s cheapest edible oil, it has become the primary cooking oil for

the majority of people in the developing world of Asia, Africa, and the Middle East. The consumer base in these regions is 

sensitive. Given there are currently no viable and affordable alternatives to palm oil 

for most of these consumers, any significant reduction in the growth rate of Malaysian production will mak

them to increase the use of edible oils in their diets.

Malaysian palm oil companies have engineered a sustained long-term expansion of plantation area, increasing 3.85 million 

hectares since 1980 or 385 percent. Much of this development has been at the expense of native tropical forest, with 

ver in core palm oil producing areas declining dramatically over the same period. In 2010 the 

government estimated that approximately 58 percent of the total national land area remained forested, and that its official 

untry forested in perpetuity. Therefore, time and land availability is quickly running 

out for the palm oil industry. The reality is that virtually all highly suitable areas have already been developed, and that 

even marginal land is now becoming scarce. The province which reportedly has the most remaining development potential 

June 28, 2011

For the past 30 years Malaysia has been a world leader regarding organizing an efficient and highly productive commercial 

oil palm plantation sector, as well as in pioneering important agricultural research and varietal development that benefited 

producers throughout the region. As a result of the coordinated efforts of government and commercial companies 

2010), Malaysian palm oil production increased roughly 600 percent – averaging 7 

ia was the world’s leading producer and supplier of palm oil and its various by-products 

for much of this period, only recently being eclipsed by its neighbor Indonesia. The strength and continuity of the 3 

ement, being a product of substantial financial investment, a large 

h may be coming to an end as a 

variety of physical obstacles and government policies have begun to weigh on the palm oil industry’s productivity. As a 

result, the prospect of stagnating future output from the world’s second largest palm oil producer may be virtually 

unavoidable. This outcome would be a real concern to the international edible oil market, given there are few if any other 

roughly 2.3 million tons per year over the past 10 years, with Malaysia 

supplying nearly 30 percent of the increase in production required to meet this demand. Indonesia has supplied 62 

e pressure being brought to bear on the Indonesian 

government to halt or slow its own oil palm plantation expansion owing to international environmental and greenhouse 

e likelihood of sustained high 

prices in the edible oil market. Since palm oil is the world’s cheapest edible oil, it has become the primary cooking oil for

ase in these regions is 

sensitive. Given there are currently no viable and affordable alternatives to palm oil 

for most of these consumers, any significant reduction in the growth rate of Malaysian production will make it difficult for 

term expansion of plantation area, increasing 3.85 million 

hectares since 1980 or 385 percent. Much of this development has been at the expense of native tropical forest, with 

ver in core palm oil producing areas declining dramatically over the same period. In 2010 the 

government estimated that approximately 58 percent of the total national land area remained forested, and that its official 

untry forested in perpetuity. Therefore, time and land availability is quickly running 

out for the palm oil industry. The reality is that virtually all highly suitable areas have already been developed, and that 

he province which reportedly has the most remaining development potential 
is Sarawak, though much of the available land is low

claims. 

The Malaysian industry indicates that owing to these 

million hectares by 2020, meaning there is only about 750,000 hectares left for future expansion. At current annual 

growth rates of 180,000 hectares per year, that leaves Malaysian planters

In fact, Malaysian companies have long since recognized that time is growing short for expansion domestically, and as a 

result have radically increased oil palm investments and landholdings in other countrie

Malaysian companies have collectively established over 1.0 million hectares of active oil palm plantations in Indonesia and 

own a further 1.0 million hectares of land (land bank) which has official permits allowing its deve

a result of these sizable investments, Malaysian conglomerates have become the 2nd largest commercial palm oil 

enterprises in Indonesia – behind only the Indonesian companies themselves.

Stagnating National Yields

Another issue which indicates that future palm oil production growth may slow is the recent stagnation of national yields, 

despite the availability of ample financing, crop inputs, and agronomic knowledge. Trend yield growth prior to 2008 had 

is Sarawak, though much of the available land is low-lying coastal peatland and/or degraded inland forest with native 

The Malaysian industry indicates that owing to these constraints national palm oil area will likely peak at roughly 5.6 

million hectares by 2020, meaning there is only about 750,000 hectares left for future expansion. At current annual 

growth rates of 180,000 hectares per year, that leaves Malaysian planters with about 6 years before they run out of land. 

In fact, Malaysian companies have long since recognized that time is growing short for expansion domestically, and as a 

result have radically increased oil palm investments and landholdings in other countries such as Indonesia and Liberia. 

Malaysian companies have collectively established over 1.0 million hectares of active oil palm plantations in Indonesia and 

own a further 1.0 million hectares of land (land bank) which has official permits allowing its development in the future. As 

a result of these sizable investments, Malaysian conglomerates have become the 2nd largest commercial palm oil 

behind only the Indonesian companies themselves.

which indicates that future palm oil production growth may slow is the recent stagnation of national yields, 

despite the availability of ample financing, crop inputs, and agronomic knowledge. Trend yield growth prior to 2008 had 

lying coastal peatland and/or degraded inland forest with native 

constraints national palm oil area will likely peak at roughly 5.6 

million hectares by 2020, meaning there is only about 750,000 hectares left for future expansion. At current annual 

with about 6 years before they run out of land. 

In fact, Malaysian companies have long since recognized that time is growing short for expansion domestically, and as a 

s such as Indonesia and Liberia. 

Malaysian companies have collectively established over 1.0 million hectares of active oil palm plantations in Indonesia and 

lopment in the future. As 

a result of these sizable investments, Malaysian conglomerates have become the 2nd largest commercial palm oil 

which indicates that future palm oil production growth may slow is the recent stagnation of national yields, 

despite the availability of ample financing, crop inputs, and agronomic knowledge. Trend yield growth prior to 2008 had 
been strong, averaging roughly 4 percent per year. But since then average national yields have unexpectedly declined by 

about 13 percent.

A number of factors have reportedly led to the sharp fall off in average yields over the past 4 years, including adverse 

weather (El Nino - drought, La Nina – heavy rains), declining fertilizer use, and low replanting rates. It is estimated that 

25-30 percent of Malaysian oil palm trees are 20

prices have suppressed normal replanting rates. Growers are reportedly loathe to replace actively producing trees at a 

time of record profits with young seedlings which require nearly 7 years to equal their output. Taking area out of 

production for 3 or more years just doesn’t make go

potential of the older trees is also significantly lower than that of cultivars available today and to new clonal varieties 

being developed. The longer the lag in replanting these older cultivars

average yields.

In addition to these factors, reports have surfaced that skilled labor shortages have plagued some regions, reducing 

harvest activity by 50 percent and leaving ripe but un

may be the largest issue facing the industry, as palm oil estates rely heavily on immigrant Indonesian workers. The 

Malaysian Employer’s Federation reports that at least 80 percent of oil palm estate emp

nationality. At the same time, robust growth in plantings in Indonesia are creating lots of jobs for skilled plantation 

workers and causing acute competition for labor. Wage pressure is reportedly hitting Malaysian plantations as t

compete for needed manpower. Given future growth prospects in the palm oil industry in Indonesia, this problem will 

continue for Malaysian producers unless wages and benefits rise significantly and restrictive Malaysian immigration laws 

are amended.

In any case a return to historical trend yield growth is not expected soon, unless and until a major replanting campaign 

has been completed. The government reports that current annual replanting rates average 3

national area, and that it will take approximately 25 years to replant the entire national acreage.

Production Growth Uncertain

Over the next 6-10 years while Malaysia’s oil palm acreage continues to expand, it is still expected to marginally increase 

annual palm oil production. Over that period, assuming average yields range between 4.0

annual production may increase a total of 5

until there has been considerable progress in 

varieties. Industry officials indicate that currently available HYV cultivars can yield 50

would be replacing, so there is real potential to achiev

percent of the national crop has been replanted. Assuming Malaysia can resolve its labor issues, it is simply a matter of 

time before the country can once again achieve strong and reliable produ

to help offset rising global demand. Before this happens however, Malaysia may underperform for a considerable number 

of years. Replanting rates are currently well

profits are both very high. As long as these conditions are sustained there is an increased likelihood that Malaysia will tak

considerably longer to achieve the growth rates it is inherently capable of.

hly 4 percent per year. But since then average national yields have unexpectedly declined by 

A number of factors have reportedly led to the sharp fall off in average yields over the past 4 years, including adverse 

heavy rains), declining fertilizer use, and low replanting rates. It is estimated that 

30 percent of Malaysian oil palm trees are 20-30 years old (past the peak period of yields), and that high international 

replanting rates. Growers are reportedly loathe to replace actively producing trees at a 

time of record profits with young seedlings which require nearly 7 years to equal their output. Taking area out of 

production for 3 or more years just doesn’t make good economic sense under the circumstances. The genetic yield 

potential of the older trees is also significantly lower than that of cultivars available today and to new clonal varieties 

being developed. The longer the lag in replanting these older cultivars, the greater long-term delay in improving national 

In addition to these factors, reports have surfaced that skilled labor shortages have plagued some regions, reducing 

harvest activity by 50 percent and leaving ripe but un-harvested fruit rotting on the plantation. The growing labor problem 

may be the largest issue facing the industry, as palm oil estates rely heavily on immigrant Indonesian workers. The 

Malaysian Employer’s Federation reports that at least 80 percent of oil palm estate employees are of Indonesian 

nationality. At the same time, robust growth in plantings in Indonesia are creating lots of jobs for skilled plantation 

workers and causing acute competition for labor. Wage pressure is reportedly hitting Malaysian plantations as t

compete for needed manpower. Given future growth prospects in the palm oil industry in Indonesia, this problem will 

continue for Malaysian producers unless wages and benefits rise significantly and restrictive Malaysian immigration laws 

any case a return to historical trend yield growth is not expected soon, unless and until a major replanting campaign 

has been completed. The government reports that current annual replanting rates average 3-4 percent of the total 

it will take approximately 25 years to replant the entire national acreage.

10 years while Malaysia’s oil palm acreage continues to expand, it is still expected to marginally increase 

Over that period, assuming average yields range between 4.0-4.2 tons per hectare, total 

annual production may increase a total of 5-6 million tons over current levels. But thereafter production should stagnate 

until there has been considerable progress in replacing older trees with new higher yielding (HYV) clonal and non

varieties. Industry officials indicate that currently available HYV cultivars can yield 50-75 percent higher than those they 

would be replacing, so there is real potential to achieve substantial future growth in national production once 25

percent of the national crop has been replanted. Assuming Malaysia can resolve its labor issues, it is simply a matter of 

time before the country can once again achieve strong and reliable productivity growth and sufficient palm oil production 

to help offset rising global demand. Before this happens however, Malaysia may underperform for a considerable number 

of years. Replanting rates are currently well-below industry-recommended levels and international palm oil prices and 

profits are both very high. As long as these conditions are sustained there is an increased likelihood that Malaysia will tak

considerably longer to achieve the growth rates it is inherently capable of.

hly 4 percent per year. But since then average national yields have unexpectedly declined by 

A number of factors have reportedly led to the sharp fall off in average yields over the past 4 years, including adverse 

heavy rains), declining fertilizer use, and low replanting rates. It is estimated that 

30 years old (past the peak period of yields), and that high international 

replanting rates. Growers are reportedly loathe to replace actively producing trees at a 

time of record profits with young seedlings which require nearly 7 years to equal their output. Taking area out of 

od economic sense under the circumstances. The genetic yield 

potential of the older trees is also significantly lower than that of cultivars available today and to new clonal varieties 

term delay in improving national 

In addition to these factors, reports have surfaced that skilled labor shortages have plagued some regions, reducing 

rotting on the plantation. The growing labor problem 

may be the largest issue facing the industry, as palm oil estates rely heavily on immigrant Indonesian workers. The 

loyees are of Indonesian 

nationality. At the same time, robust growth in plantings in Indonesia are creating lots of jobs for skilled plantation 

workers and causing acute competition for labor. Wage pressure is reportedly hitting Malaysian plantations as they 

compete for needed manpower. Given future growth prospects in the palm oil industry in Indonesia, this problem will 

continue for Malaysian producers unless wages and benefits rise significantly and restrictive Malaysian immigration laws 

any case a return to historical trend yield growth is not expected soon, unless and until a major replanting campaign 

4 percent of the total 

10 years while Malaysia’s oil palm acreage continues to expand, it is still expected to marginally increase 

4.2 tons per hectare, total 

6 million tons over current levels. But thereafter production should stagnate 

replacing older trees with new higher yielding (HYV) clonal and non-clonal 

75 percent higher than those they 

e substantial future growth in national production once 25-50 

percent of the national crop has been replanted. Assuming Malaysia can resolve its labor issues, it is simply a matter of 

ctivity growth and sufficient palm oil production 

to help offset rising global demand. Before this happens however, Malaysia may underperform for a considerable number 

rnational palm oil prices and 

profits are both very high. As long as these conditions are sustained there is an increased likelihood that Malaysia will take 
Current USDA area and production estimates for grains and other agricultural commodities are available on IPAD's 

Agricultural Production page or at PSD Online

For more information contact Michael Shean

USDA-FAS, Office of Global Analysis 

Current USDA area and production estimates for grains and other agricultural commodities are available on IPAD's 

PSD Online.

Michael Shean | michael.shean@fas.usda.gov | (202) 720-7366

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Current USDA area and production estimates for grains and other agricultural commodities are available on IPAD's