SMALLHOLDERS have been the focus of attention lately with the Minister of Plantation and Commodities Datuk Seri Johari Abdul Ghani, who took office last December, mooting the idea of having the 214,680 independent smallholders (ISHs) working on 822,073ha consolidate and form clusters of about 8,000ha to 10,000ha. No timeline was given for this to take place, but questions have been raised as to how the government plans to do this.

What is known is that land ownership will remain with the ISHs, as Johari clarifies in his response to queries from The Edge (see “Consolidation will not ‘take over any land from individual landowners’”).

The motivation behind the idea to consolidate is to extract more value from the land, with smallholders managing 27% or 1.5 million hectares of the 5.7 million hectares of oil palm plantations as many of them, with parcels of land measuring only 4ha, have difficulty raising their yields.

Smallholders are defined as farmers owning or leasing an area of land measuring less than 40.6ha or about 100 acres. There are two categories of smallholders — those organised under schemes, such as those by the Federal Land Development Authority (Felda) or Felcra Bhd, and ISHs who work the land themselves or employ workers to do so.

Note that smallholders are exempted from the windfall profit levy.

There is general agreement among industry experts and ISHs themselves that consolidation is a good idea and would help to improve productivity and income levels. But as the minister acknowledged in his speech at the 35th Palm & Lauric Oils Price Outlook Conference & Exhibition (POC) in Kuala Lumpur on March 5, it won’t be easy.

The oil palm smallholder

According to international civil society organisation Solidaridad, oil palm smallholders only generated US$17 billion or 6% of value in the industry’s entire chain worth US$282 billion in 2020. Interestingly, it points out that “the concept of ‘profit’ may not be applicable” to small-scale planters with fast-moving consumer goods (FMCG) players and retailers capturing 66% of the gross profits from “embedded palm oil”.

Nevertheless, Solidaridad notes in its inaugural Small Farmer Atlas report on eight cash crops that most of the oil palm smallholders it surveyed in Indonesia, Malaysia and Ghana “see themselves as relatively well-off compared to the average farmer in their country”. It adds that the fresh fruit bunches (FFBs) can be harvested the whole year round, providing a steady cash flow, and oil palm is often seen as “the one crop that can help a family out of poverty within a generation”.

What is holding back Malaysia’s ISHs? How productive are they?

There is no publicly available data on ISHs’ FFB or oil yield per hectare but given their small land area, they have difficulty scaling their operations and improving efficiency and yields. What’s more, the lack of discipline in replanting among smallholders — both organised and independent — has often been cited as one of the contributing factors to the stagnant national yield.

At the POC, Johari said the replanting rate between 2014 and 2023 had remained low at 1.8% annually. Industry best practices require 4% to 5% of oil palm trees to be replanted every year. “Otherwise, by 2027, over 560,000ha of oil palm trees will be over 25 years old. This would lead to lower production in the future,” he pointed out.

Note that 560,000ha is almost 10% of the total planted area of oil palm in Malaysia.

Smallholders are reluctant to chop down their old oil palms to replant when crude palm oil (CPO) prices are high. Oil palms have a productive life of 25 to 30 years.

“Oil palm is usually replanted after 25 years when yields have declined and palms have become too tall. But at times of high CPO prices, planters as well as smallholders tend to delay replanting in order to cash in on immediate financial gains rather than replanting with superior new-generation planting materials,” says Teoh Cheng Hai of Solidaridad Network Asia.

Then there is the cost of replanting itself and the lack of income while the oil palm trees reach the age when they start bearing fruit, which could take up to three years. A few of the ISHs The Edge spoke to complained about the lack of financial support from the government to undertake replanting.

Early this year, it was reported that the government had allocated RM100 million for the Smallholder Palm Oil Replanting Financing Incentive Scheme (TSPKS 2.0), which is distributed by Agrobank. The financial support will be in the form of a grant (50%) and loan (50%).

One way to make up for the lack of income as the trees mature is intercropping, whereby banana or papaya trees are planted between the oil palms.

“The replanting rate that the smallholders undertake right now is slower. And as you know, the cost to manage on a per hectare basis has also increased. So for them, ‘If I’m getting only RM500 a month and if I plant durians I can get RM1,200, I can double my income level — why should I bother to do oil palms?’” says FGV Holdings Bhd group CEO Datuk Nazrul Mansor, who spoke about consolidating oil palm smallholders at last year’s POC.

The low replanting rate has caused the country’s total production of CPO to stagnate at below 19 million tonnes for many years, unable to cross the 20 million tonne threshold, he adds. Also, the expansion of planted area has been curbed in the last decade or so by the focus on deforestation and environmental, social and governance (ESG) concerns.

Inevitably, Malaysia’s FFB and CPO yield per hectare has not just stagnated but has been on a decline in recent years (see chart on average CPO yield in Malaysia).

Palm oil production received a shot in the arm in the 1980s when the weevil Elaeidobius kamerunensis was introduced into Malaysia’s oil palm estates to increase pollination. Various reports say the FFB yield went up 20% in Peninsular Malaysia and as much as 53% in Sabah. The introduction of the weevil brought an end to pollination by hand at oil palm plantations.

However, the pickup in yield could not be sustained. Even in comparison with other oilseeds, oil palm’s performance has been disappointing.

According to Dr Julian Conway McGill of agricultural commodity advisory Glenauk Economics, the oil palm used to yield four times as much oil per hectare as US soybeans in the mid-1970s and 1980s. But today, it is only double.

It is a similar story when compared against EU rapeseed oil and Russian sunflower oil. He notes that the major concern for oil palm “is not its structurally higher labour requirement, but its poor yield performance”.

The main reason for this is because other oilseeds, being annual crops, have been improved on over the years.

“There is a major structural difference between annual crops, such as the oilseeds, and tree crops such as oil palm — oilseeds are replanted each year while oil palms are mostly replanted after 25 years (although some estates now replant earlier). As a result, for oilseeds, there is a much larger market for seeds, allowing much greater investment in improving yields and the ability to take advantage of improvements in the next year. The market for oil palm seedlings, by contrast, is much smaller and the opportunity to introduce new varieties is only four times in a hundred years (based on replanting at 25 years),” McGill explains, noting that oil palm has always been handicapped in this regard when compared with rival oilseeds.

Not only that, palm oil yields have been declining relative to its own potential.

“Harvesting oilseeds is also significantly easier to mechanise. The oil palm is a fruit tree, and the mechanisation of harvesting fruits (even in the developed world) has been very difficult — although companies, notably Sime Darby Plantation, are investing large amounts and working hard to find a solution. As a result, palm oil yields have suffered from the difficulty in finding skilled harvesters, which means not all fruit managed to reach the mill,” he adds.

While waiting for technology to bring about the solutions to help improve yields, manual labour is still very much needed and Malaysia has to depend on foreigners to work in the fields as skilled harvesters, especially those from Indonesia. With Indonesia’s own oil palm plantations needing harvesters, it has not been easy for their Malaysian counterparts to hire and train Indonesians, much less locals to work in the estates.

To that end, the government has started a Technical and Vocational Education and Training initiative to train local harvesters to identify ripe FFB, cut the fronds and harvest the fruit. According to Johari, 60 students will be trained under a pilot project that starts in April by the Institute of Malaysian Plantation and Commodities.

With locals unwilling to work in the estates, ISHs also have the problem of “keeping the farm in the family”. Hiring contractors to manage the plantation is a common route taken by landowners as they advance in age with no family member willing to take over.

Ng Su Yong, who owns a 5-acre (2ha) parcel in Segamat, Johor, planted with 15-year-old palms, seems to be the exception. Growing up in a family involved in the trading of rubber, FFB and fertiliser, the 36-year-old ventured upstream into planting durian, passion fruit and oil palms.

He finds oil palm planting to be less laborious and cheaper compared to that of durians but the latter yields more income for him. He employs contractors to work on his crops and also runs a business packing and selling passion fruit, its juice and paste to cafés and restaurants.

Nevertheless, Ng finds that more ISHs have moved to durian farming in the last decade or so. “The income from durians could reach RM100,000 per acre compared to just RM15,000 for oil palm in 2022 or RM7,000 in 2023,” he says, adding that another reason for ISHs switching out of oil palm is due to losses from the ganoderma disease that kills the trees.

Most of Ng’s land is dedicated to durian and passion fruit planting, with oil palm making up only a small portion of his total land bank. His oil palms produce up to 17 tonnes of FFB a year, which is higher than the national average of 15.49 tonnes in 2022.

Nevertheless, industry experts say there are many efficient ISHs producing up to 22 tonnes of FFB a year and making a good income with the high CPO prices in recent years.

“There are independent smallholders who are excellent farmers. Hopefully, the better performing farmers will be able to transfer their knowledge to those who are achieving lower productivity,” says McGill.

“For major companies, having sufficient workers is the main short-term focus, and the ministry and industry are working very hard to bring in harvesters. In the past, the high productivity of the oil palm alone made it very profitable for growers and meant that they could focus on downstream investments instead. As labour and other input costs continue to rise, producers will have to focus strongly on yield improvements to defray these increasing costs,” he adds when asked about the industry’s yield problem.

Notwithstanding the shortage of workers and delayed replanting weighing on the oil yield of Malaysian oil palm plantations, Solidaridad’s Teoh says the lack of quality management at the estates could also be contributing to the stagnant national FFB and oil yields.

“The national yield in 2022 was 3.05 tonnes of oil per hectare compared with 4.0 tonnes not too long ago. The productivity among smallholders is even lower. An MPOB survey showed that there is a 40% yield gap between the potential yield of 26.6 tonnes of FFB per hectare and the actual yield of 10.6 tonnes of FFB. Many reasons have been given for poor yield performance such as shortage of labour, especially harvesters, and ageing palm profile. Is the quality of plantation management by planters another factor?” he says.

Teoh even suggests that with the increasing focus on ESG compliance, some major players tend to pay more attention to sustainability auditors and “box ticking” rather than to agronomists who provide technical advice and support to ensure sustainable production.

He also notes that the agricultural courses in universities have not evolved much over the years with the rare exception of Universiti Teknologi Mara (UiTM), which offers degree courses in plantation management and agrotechnology (agronomy), providing training in basic sciences and highlighting emerging issues in agriculture such as sustainable agriculture, climatology, precision agriculture and environmental management in plantations.

“Based on the current knowledge and technology, we can get a 20% improvement in yield. Labour shortage is a big factor but good management in the field is crucial as well,” says Teoh.

Funding the consolidation exercise

One question that comes up is who will fund the cost of managing the clusters of ISHs that are created? Will the big plantation companies that already face various problems of their own be willing to share the financial burden?

Some have suggested that the windfall profit tax collected from the plantation companies be used to help the smallholders, instead of channelling the proceeds to the federal government’s consolidated fund.

Last year, almost RM1 billion was collected, down from RM3.02 billion in 2022. The Ministry of Finance has estimated a collection of RM1.02 billion in 2024.

Producers in Peninsular Malaysia are taxed 3% when CPO prices are above RM3,000 per tonne, while those in Sabah and Sarawak are taxed at the same rate when CPO prices are above RM3,500 per tonne.

On managing the ISH clusters, Nazrul’s view is that the smallholders should be empowered and involved, similar to a cooperative. “What I envisage is for the smallholders to be empowered by the government agencies to operate the land themselves. Empowering them just like a typical farmer in New Zealand, Denmark or the Netherlands, where they are parked under the umbrella of a cooperative and then undertake long-term [supply] contracts with the cooperative.”

Currently, there are a number of smallholder platforms in the country, including 69 smallholder cooperatives and 162 Sustainable Palm Oil Clusters under the Malaysian Sustainable Palm Oil certification. Industry players believe these platforms may be engaged in the plan to form clusters of ISHs.

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