Rats, drought and labor shortages eat away at global edible oil recovery

PERAK, Malaysia / SINGAPORE (Reuters) – At a large oil palm plantation in the Malaysian state of Perak, watermelon seedlings grow from freshly plowed land between young palm trees while hired cows graze in areas invaded by the vegetation.

A coronavirus pandemic-induced labor shortage has forced managers at the 2,000-hectare Slim River estate to find creative ways to nurture their fields, even as prices for the most edible oil rise. consumed in the world are close to records.

“It’s easier to pull our teeth out than to have new workers now,” said estate manager Ravi, who gave only his first name. “I cannot find the workers to maintain the fields.

Malaysia, the world’s second-largest producer of palm oil, is facing a perfect storm of production headwinds that will likely drive global stocks to their lowest level in five years.

The Southeast Asian country is a microcosm of the challenges facing producers of various edible oils on multiple continents, from Canadian canola growers to Ukrainian sunflower growers, as they struggle to meet high demand. .

Global food prices have hit 10-year highs this year – the Food and Agriculture Organization (FAO) price index has risen by more than a third since last summer – in big partly because of a surge in the prices of vegetables which are vital for preparation foods and as fat in many daily staples.

FAO’s Global Edible Oils Index is up 91% since last June and is expected to rise further as economies reopen following COVID-19 closures, increasing food and fuel consumption of edible oils .

But producers face a series of hurdles, including labor shortages, heat waves and pest infestations, which are driving collective stocks of the world’s most consumed edible oils – palm, soybeans. , canola (rapeseed) and sunflower seeds – at their lowest levels in a decade. .

MALAYSIAN MALAYSIA

In Malaysia, which accounts for around 33% of global palm oil exports, the average yield of palm fruit bunches in January-June fell to 7.15 tonnes per hectare from 7.85 a year ago. Data from the Malaysian Palm Oil Board shows average crude palm oil yields declining to 1.41 tonnes per hectare, from 1.56 tonnes during the same period last year.

Many plantations were harvesting with two-thirds or less of the required labor force, after government restrictions on coronaviruses cut off the usual supply of migrant workers from Indonesia and South Asia.

More than half a dozen plantation owners polled by Reuters said the lack of workers forced them to extend their harvest window from 14 days to 40 days, a change that compromises fruit quality and risks loss of fruit. parts of the fruit clusters.

“It’s particularly bad in Sarawak. Some companies are seeing their production drop by 50% because of the shortage of harvesters, ”said a plantation manager, who requested anonymity because he was not authorized to speak to the media.

The Slim River estate delayed replanting and closed its nursery for the first time in 20 years to redeploy workers for the harvest.

Another plantation manager, named Chew, said he was forced to raise wages by 10% to keep the workers.

Less labor to maintain the plantations also means more pests, including rats, moths and bagworms.

“This has created an environment for the rats to nest, feed and breed and natural predators cannot catch up,” said Andrew Cheng Mui Fah, a plantation manager in Sarawak.

In Slim River, Ravi said about a quarter of the estate was facing an infestation of bagworms that “would skeleton the leaves and cause small clumps (of fruit) to form.”

He was referring to the larvae of the moth that grow and feed on trees.

INDONESIAN MILLS

Neighboring Indonesia, the world’s largest producer of palm oil, does not have the same labor shortage issues and production is expected to increase this year as more acreage has been planted with palm.

However, the operations of palm oil mills, where palm fruit is converted into crude palm oil, have been affected by restrictions related to COVID-19, said Dorab Mistry, director of the Indian consumer goods company. and large consumer Godrej International.

“The shutdown of palm oil factories across Malaysia (and) Indonesia has been a huge drag on the production side,” he told the US Soy Export Council’s annual conference on the 25th. August.

The 2021 total production of Indonesia and Malaysia, which together account for about 90% of the world’s palm oil, was estimated at 66.2 million tonnes, according to Refinitiv Commodities Research published on August 4.

That’s roughly stable from 2020, but analysts said downward revisions are likely if labor shortages and pest infestations worsen.

KIND DRY IN NORTH AMERICA

Meanwhile, farmers in western Canada planted canola in some of the driest soils in a century this spring, sending canola futures prices to all-time highs in early May.

A heat wave in July then scorched crops across the Canadian prairies, prompting the United States Department of Agriculture (USDA) to reduce its estimate of canola production from 4.2 million tonnes to 16 million. tonnes, the lowest since the 2012-13 season.

“We haven’t had a lot of rain to speak of and the crop is drying out,” said Jack Froese, who has grown canola near Winkler, Man., For almost 50 years.

Froese expects a yield per acre of just a quarter of last year’s level: “It’s very disheartening.

US soybeans have also been plagued by drought, with the USDA lowering its production forecast by 1.8 million tonnes in August from the previous month.

This is expected to reduce US soybean oil inventories to their lowest level in eight years and US soybean oil exports to their lowest level in ten years.

“We’re looking at an average harvest because we were fortunate enough to have some moisture in the basement,” said Jared Hagert of his farm in North Dakota. “But you don’t have to go too far west of here to get into some really tough crops.”

Good news for buyers, the soybean harvest in Brazil is expected to reach a record 144.06 million tonnes in the 2020/21 season, thanks to a 4% increase in planted area, the consulting firm estimated. in Agribusiness Datagro.

Ukraine, the largest producer of sunflower seeds according to USDA, is expected to increase production by 18% from a drought-affected 2020 crop and oil exports are expected to reach 6.35 million tonnes from 5.38 million last season, according to its agriculture ministry.

DEGRADED OUTLOOK

Nonetheless, the outlook for edible oil production remains poor overall and inventories are expected to tighten further, leaving markets tight until next year and adding to inflationary pressures, some analysts say.

In Malaysia, worsening COVID-19 outbreaks will leave plantations deprived of workers for the remainder of the peak palm production window.

Canadian farmers continue to face drought conditions, which has led the official agency StatsCan to reduce canola production by 24.3% and yields by 30.1%.

“We have multiple issues with the supply of edible oil to the world, palm oil in Malaysia, canola in Canada and La Nina reducing soybean production in South America,” Mistry said.

“We expect the oil content of the canola crop in Canada to decline due to the drought,” he said. “The tightening of the vegetable oil supply is expected to continue until 2022.”

The pressure on inventories is already reflected in consumer prices and the upward trend is expected to continue, especially as refiners increase their prices to cover soaring raw material costs.

Singapore-based Wilmar International said a mismatch between soaring raw material costs and the hike in consumer prices imposed in the first half of the year had a negative impact on margins.

Mewah Group, one of the largest refineries in the region, said the average selling prices of its bulk products and consumer packaging rose nearly 54% and 24% respectively in the first half of the year compared to one year ago.

“Everyone along the supply chain absorbs some of the higher costs,” said Oscar Tjakra, senior food and agri-food research analyst at Rabobank. “The surge in costs is expected to continue next year.”

With global consumers already facing general economic uncertainty due to the coronavirus pandemic, further increases in the prices of edible oils will take a toll on many livelihoods due to the inelastic nature of food demand.

Several countries, including Nigeria, Egypt, Turkey and the Philippines, have all seen sharp increases in food inflation in recent months. Price pressure could continue as the higher costs of edible oil are passed on to suppliers, leaving consumers with no choice but to pay for the staple food.

“Even in the poorest regions, like sub-Saharan Africa, where consumers suffer enormously from high prices, consumption has only declined very slightly,” said Julian McGill, head of Southeast Asia at LMC International.

“There just isn’t a lot of flexibility in the dietary use of vegetable oils.”