This article first appeared in The Edge Malaysia Weekly on October 7, 2024 - October 13, 2024

THE tables have certainly turned for Minister of Plantation and Commodities Datuk Seri Johari Abdul Ghani, who less than a decade ago was deputy finance minister and then minister of finance II in Datuk Seri Najib Razak’s administration.

In September, he disclosed that he had submitted a proposal to the Ministry of Finance (MoF) to revise the windfall profit levy (WPL) on palm oil ahead of Budget 2025.

“I’ve been there … [I] used to get all this info on the levy. It’s revenue for the government,” Johari says in an interview with The Edge.

Reintroduced in 2008, the WPL imposes a 3% tax when the price of crude palm oil (CPO) exceeds RM3,000 per tonne in Peninsular Malaysia and RM3,500 per tonne in Sabah and Sarawak. Smallholders are exempted from the WPL.

Johari had proposed to the MoF to either abolish or raise the threshold price at which the WPL is applicable. This is because the cost of production for planters has increased to an average of RM2,800 to RM3,000 per tonne. Given the lower CPO prices, the term “windfall profit” has become redundant.

“So, when you want to call [for] a windfall levy, [you do it] when the CPO price is, maybe, RM5,000. Anything below [RM5,000] is all subject to corporate tax,” he explains.

According to industry players, from 2019 to 2023, the government collected RM6.1 billion in WPL. Plantation players have been lobbying for a revision to the WPL over the last few years, given the increasing cost of production.

The Malaysian Estate Owners’ Association (MEOA) agrees with the minister’s position. “To put it simply, we are not against the WPL, but the current mechanism is irrelevant because costs are much higher than when it was first put in place,” says its president Zachry Aman.

In a dialogue with the ministry, MEOA had proposed to raise the threshold — based on 10% post-tax return on investment (ROI) — to RM4,700 for Peninsular Malaysia, RM5,800 for Sabah and RM6,300 for Sarawak.

“Another key point to note about our proposal is to use regional costs rather than the Malaysian average, as the cost of production varies and is higher in Sabah and Sarawak,” Zachry adds.

Notably, CPO in the two states is subject to a state government sales tax: 7.5% in Sabah and 5% in Sarawak. Planters also pay RM16 per tonne of CPO produced to the Malaysian Palm Oil Board (MPOB), the ministry’s regulatory and R&D agency.

According to estimates by Joseph Tek, former president of MEOA and former chief executive of the Malaysian Palm Oil Association, in 2023, the sector paid a total of RM7.87 billion in the WPL, state sales taxes, MPOB cess and income tax, which works out to 32.5% of its business profit (profit before tax, assuming no WPL and state sales tax).

But can the government afford to forgo the revenue from the WPL, which goes into the consolidated fund?

If he had his way, Johari would abolish the cooking oil subsidy that costs the government several billion ringgit a year. The 1kg polybag cooking oil, priced at RM2.50 each, was subsidised by the government to the tune of RM845.5 million in 2023 and a whopping RM4 billion in 2022.

With an annual quota of 720,000 tonnes, the cooking oil is targeted at lower-income consumers and micro traders.

“So, I was looking at whether it was necessary to continue with this ... Because you can hardly buy one packet. They all go to middlemen. I would prefer to just abolish this [subsidy] and then subsidise them [B40 consumers] through cash transfers,” says Johari, Member of Parliament for Titiwangsa.

Last November — just before he was made minister in December — he had proposed in parliament that the difference between the market price and the subsidised price (RM2.50) of cooking oil be given to each B40 household in cash transfers.

Johari believes this would prevent leakages by wholesalers who sell the subsidised cooking oil to micro traders at inflated prices or for the oil to be used as biofuel.

Then, in March, to improve yields, Johari proposed the consolidation of independent smallholders (ISH) into clusters of 8,000ha to 10,000ha and roping in the big plantation players to help manage them.

“Why [do] I say ‘consolidate’? So that the private sector can come and do the replanting and then manage through good agricultural practices,” he says, referring to smallholders who fail to replant consistently, contributing to the decline in national production and stagnating yields.

(Smallholders are defined as farmers who own or lease tracts measuring less than 40.6ha [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 ISH, who work the land themselves or employ workers to do so.)

The aim of consolidation is to extract more value from the land, with both independent and organised smallholders managing 27%, or 1.5 million hectares, of the 5.7 million hectares of oil palm plantations. Many work on land parcels measuring only 4ha and have difficulty raising their yields.

On the low replanting rate, Johari points out that the country’s 1.8% lags behind the industry standard of 4%. “The focus is to increase the yield on the existing land. You consistently embark on replanting.

“For smallholders, funding is also an issue; we are giving small amounts [gradually] and we make sure that these are smallholders who really want to replant,” he explains.

Johari has also asked the government to consider additional allocations for the Smallholder Oil Palm Replanting Financing Incentive Scheme (TSPKS 2.0) to be included in the budget.

Asked about the timeline for consolidating the ISH, Johari says: “We are driving [the initiative]; we are talking to a few associations, cooperatives. All [of this] takes time. This is not something that’s easy to talk [about] to smallholders. But you must throw [out] the idea first. From there, you decide [what to do]. But the discussion is ongoing.”

The CPO yield of Malaysian estates has been on the decline since touching a high of 4.41 tonnes per ha in 1981. Malaysia achieved CPO yield of 3.14 tonnes per ha last year, rising slightly from 3.05 in 2022 (see chart).

Dr Julian McGill, managing director and founder of Glenauk Economics, a specialist advisory firm with a focus on agricultural commodities, says the answer to the challenges that the palm oil industry faces revolves around oil yield.

“The answer is yields, yields and yields. All individual challenges facing palm oil are solved by yield intensification. Increased wages and difficulties in securing workers can be solved by higher yields, which defray the cost of labour and ensure that workers receive a better salary,” McGill tells The Edge.

“The inability to expand the business due to restrictions in area means only higher yields can ensure that revenue continues to grow. Sustainability of palm oil can only truly be further enhanced by increasing yields and ensuring that more is produced from less.”

He says even though Malaysia has long-standing and vast experience in the management of oil palm, many of the lessons learnt by previous generations need to be “re-learnt”. “The focus will have to be increasingly on training the next generation of planters and ensuring that they maintain strict discipline in the management of the crop, [which involves] disciplined replanting with high-quality seeds.

“The need, globally, to continue to feed growing populations will mean palm oil [will always be] a key industry for Malaysia. The crop could deliver much more to the local economy and export earnings if productivity and, therefore, production could be increased through disciplined yield intensification.”

Getting the right planting material is also important in shoring up the national CPO yield. Johari says that while consolidating the ISH will take time, there are things that the ministry can do in the meantime.

“I want to engage with all these smallholders through MPOB. We will advise them on what seed, clone, seedlings to use … Don’t buy the seedlings online. You must go to the authorised company because, if you buy the wrong seed, you will realise only after three years that it’s the wrong seed. It will be too late to do anything. [That is why] good agricultural practice is important,” he stresses.

As for the labour shortage triggered by the pandemic, Johari and his ministry may have managed to obtain the lifting of hiring restrictions on migrant workers in the palm oil industry, but the work remains unappealing to locals.

“Although we still need foreign workers … harvesting is not a 3D [dirty, dangerous and difficult] job. Picking up the fruits to put in the lorry, [however,] is a 3D job — but now we have mechanisation,” says Johari.

Indonesia’s advantage over Malaysia is the supply of land and workers in the archipelago; and it replaced Malaysia as the world’s top producer of palm oil in the mid-2000s. Indonesia now produces close to 50 million tonnes, overshadowing Malaysia’s 18 million tonnes.

Another challenge for the industry is the various regulations related to deforestation and climate change being imposed by buyers, he says, alluding to the European Union Deforestation Regulation. It was set to be implemented on Dec 30, 2024, but has been delayed by a year, the European Commission said last Wednesday.

Johari believes these efforts must be embraced or Malaysia may be unable to sell its output in the future.

“As long as we know [what the buyers require], we just make sure that we comply, show our interest also. Why do we sign all these commitments [such as the 1992 Rio Declaration]? So, this is part of moving towards achieving the commitment that we have made to the world. It’s not a question of a product [that is not saleable].” 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.