Introduction This write-up will look at the future of palm oil and how an Indonesian palm oil producer

(Asian Agri) can ensure sustainable growth of the years to come in the palm oil business. Background Over the last three decades the demand for palm oil has seen a spectacular nearly threefold growth. Not only have the demanded and supplied quantity grown over the years also the price has been rising (see figure 1). Over the next decennia the global demand for palm oil is expected to continue to grow from 45 million tons in 2009 to 63 million tons in 2015.i The prime drivers for demand for palm oil have been edible use (edible oils such margarine and cooking oil) and non-edible uses of palm oil such as for personal care products and biofuel. Both areas are growth areas. The demand for palm oil for edible use has seen a major growth due to increasing demand among consumers for healthy food and government regulations that increasingly move towards a ban of trans fatty acids.ii The albeit slow global trend towards greening economies has also led to a search for more environmental friendly ways of filling-up car and even plane tanks.iii Indonesia with its excellent palm growing climate in islands such as Sumatra and Kalimantan has played an important role in the palm oil supply business. Indonesia's yearly palm oil production has grown from 0.7 million MT in 1972 to 27.15 million MT in 2010 (see figure 2). Asian Agri The palm oil business thus has a very promising future. However, the sustainability of the growth that a company such Asian Agri from Indonesia has witnessed is not guaranteed. Asian Agri, which was established in the 1979, manages 160,000 ha of palm oil plantages.iv One of the main obstacles in expanding the acreage Asian Agri manages is the existing restriction on the number of hectares a plantation company can directly own (100,000).v Asian Agri has circumvented this by working with smallholders (600,000). Another potential challenge is the pressure from environmental organization to do more to protect the natural habitat. Early 2006, Asian Agri joined of the Roundtable for Sustainable Palm Oil (RSPO).vi In response to demands from civil society to grow more sustainable palm oil, the RSPO certifies palm oil plantages.vii However due to operational challenges, the RSPO will only able to provide RSPO certification for all Asian Agri's mills and estates by 2018.viii Though initially sustainable oil should have been sold for a premium of 70USD, however in 2010 the premium had fallen to 10USD.ix A main reason for this has been that supply has grown a lot faster than demand has (see graph 3). Proposed Strategy for Asian Agri With the expected growth in demand for palm oil and the move towards sustainable palm oil the future for Asian Agri looked bright. However, Asian Agri's acreage expansion in Indonesia had halted and Asian Agri was exploring possibilities on how best to bandwagon the expected increased demand for (sustainable) palm oil. Asian Agri has basically the five main opportunities to grow within the palm oil
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sector: 1) Increase acreage in Indonesia The problem here is that unless Indonesia chances its ownership restrictions laws (which is unlikely), Asian Agri has reached it limit on direct owning palm plantages in Indonesia. It could increase the number of smallholders it worked with but the quest for smallholders is very competitive. 2) Increase harvest from Indonesian farms The opportunity is present to start planting higher-yielding palm tree variations. Though this requires an initial investment of 3000 USD per hectare it would increase the yield with 60%. This investment would be earned back in around 9 years (see figure 4). 3) Increase production of sustainable palm oil Despite the current supply-demand mismatch, the growth of demand for sustainable palm oil is expected to explode over the next years with companies such as Nestle, Mars and Unilever switching completely to sustainable oil by 2015.x 4) Expand production through geographic expansion Asian Agri could explore entering the African market and follow competitors such as Wilmar and Agro Industries Pte Ltd.xi It needs however to undertake due diligence and ensure that its African activities will not result in potential scandals that could damage its image (see Table 1 for overview potential African countries in which Asian Agri can invest in).xii In view of this, it is recommended to explore possibilities for acquisition in countries with an equal or lower corruption index figure.xiii 5) Downstream expansion One of the subsidiaries of the Asian Agri's holding company, Royal Golden Eagle, was APICAL which refined palm oil and could also process it to end goods such as margarine. It furthermore could produce biodiesel which has a lot of export potential. However in the area of produced consumer goods APICAL would have considerable competition from established players such as Unilever. The bio-diesel sector offers considerable growth. As European countries feared that their domestic refinery industries would be losing business from such downstream expansion it is likely to enforce trade restrictions. xiv It is thus important to focus on the domestic and regional markets. Recommendations Asian Agri would do well by incrementally moving to higher-yielding harvest and speed-up its conversion to sustainable palm oil. It should furthermore explore possibilities to obtain business experience in Africa perhaps through an initial investment in a small African palm oil plantage. Finally, Asian Agri would do well by investing in producing biodiesel but it should focus on the local and Asian markets. In the meantime it would do well to ask the Indonesian Government to lobby for more access of its biodiesel and other refined palm oil products to the European and North-American markets.
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Figure 1 Palm oil price development

Source: http://www.indexmundi.com/commodities/?commodity=palm-kernel-oil&months=360 Figure 2. Indonesia Palm Kernell Oil Production

2010

2002 1995 1972

Source:http://www.indexmundi.com/agriculture/?country=id&commodity=palm-kerneloil&graph=production Begin with year 1972 with production of 0.7 million MT, 1995 production of 6 million MT, 2002 production of 12.5 million MT and 2010 production of 27.1 million MT.

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Figure 3. Demand and Supply for Sustainable Palm Oil

Source: http://www.rspo.org/files/images/charts/p8.jpg Figure 4. Return of investment to adopt higher-yielding variety

140000 120000 100000 80000 60000 40000 20000 0 -20000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10Year 11Year 12Year 13Year 14 Revenue 5mt varietySum Revenue 8mt varietySum

Assumptions: price per ton 1360 USD. Initial investment for 8mt variety would be 3000 and takes three years before harvest can start.xv

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Table 1. Overview of main palm oil producers in Africa and corruption perception
Country Malaysia Ghana Gambia Liberia Tanzania Indonesia Madagascar Gabon Benin Senegal Cameroon Nigeria Uganda Togo Congo republic Central african republic Ccote d'ivoire Guinea-bissau Guinea Congo r.d Angola Transparency index 60 69 77 91 100 100 100 100 100 112 134 134 143 143 154 154 154 154 164 168 168

Graph based on Oil Palm in Africa mapxvi and Transparency Internationals' International Corruption Perceptions Index 2011xvii

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ENDNOTES
http://asianplantations.com/en/news/press-releases/167-global-demand-for-palm-oil-growing-rapidly.html http://news.bbc.co.uk/2/hi/americas/7526624.stm iii http://www.scientificamerican.com/article.cfm?id=jumbo-jet-no-longer-biofuel-virgin-after-palm-oil-flight iv It owned 100,000 ha and 60,000 was owned by smallholders. v Article 12, Regulation No.26/OT.140/2/2007, Ministry of Agriculture. Palm Oil Plantation, industry landscape, regulation, PWC Indonesia 2010. vi The objective of the RSPO is "promoting the growth and use of sustainable oil palm products through credible global standards and engagement of stakeholders." http://www.rspo.org/page/9 Asian-Agri is registered under the name PT Inti Indosawit Subur. http://www.rspo.org/sites/default/files/PT.%20Inti%20Indosawit%20Subur.pdf vii For example see Greenpeace ppt titled: How Unilever Palm Oil Suppliers are Burning up Bornea http://www.scribd.com/doc/2578497/How-Unilever-palm-oil-suppliers-are-Burning-up-Borneo
i ii viii

http://www.rspo.org/sites/default/files/102.%20PT%20Inti%20Indosawit%20Subur%20annual%20report%202010.p df ix http://www.gtz.de/de/dokumente/en-mielke-oilworld-2010.pdf http://www.reuters.com/article/2010/03/15/us-food-summit-green-palmoil-idUSTRE62E1SE20100315 x http://www.gtz.de/de/dokumente/en-mielke-oilworld-2010.pdf xi http://biz.thestar.com.my/news/story.asp?file=/2012/2/4/business/10676394&sec=business xii Fairfood identified the following common problems in the palm-oil supply chain; Corruption, Violation of Land Rights, Insufficient Income and Income insecurity, Degradation of Natural Ecosystem, Forced Labour, Unhealthy and Unsafe Working Conditions, Water Mismanagement and Contamination. http://www.fairfood.org/research/production-chains/palm-oil/ xiii Thus Ghana, Gambia, Liberia, Tanzania, Madagascar, Gabon and Benin
http://www.thejakartapost.com/news/2011/12/06/eu-may-impose-higher-tariffs-ri-biofuel.html http://www.thejakartapost.com/news/2012/03/07/comment-eu-boycott-ri-s-palm-oil-a-lie-envoy.html
xiv

xvPrice xvi

from http://www.indexmundi.com/commodities/?commodity=palm-kernel-oil&months=360 http://wrm.org.uy/countries/Africa/Oil_Palm_in_Africa_map.html and Transparency xvii http://cpi.transparency.org/cpi2011/results/

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