Promoting Agricultural Value Chains:
In the OIC Member Countries
98
While market prospects for growth are good, Malaysia is facing a specific set of challenges.
Unlike Indonesia, Malaysia has hardly any new land left for further expansion of palm oil
plantations. In 2005, the Government of Malaysia adopted laws against the further conversion
of rainforest areas into new palm oil estates. Roughly 4 million ha are under cultivation and
with little expansion prospects, the main sources for growth will come from (1) an increase in
yield, (2) moving up the value chain and (3) regional downstream innovations, including
processed food and biodiesel.
5.5.1 Institutional framework and public policy
Palm oil production and expansion has been promoted by the Malaysian Government since the
1960s to reduce the country’s dependency on rubber and tin exports. A key driver for this
effort was the establishment of the Federal Land Development Authority (FELDA) in 1956 to
resettle the rural poor into newly developed agricultural land and organise palm oil
production by smallholders. Subsequently, the government established further schemes to
integrate the landless and unemployed into palm oil production, such as FELCRA and RISDA.
Palm oil falls under Malaysia’s Ministry of Plantation Industries and Commodities (MPIC),
which formulates policies and strategies for the overall development of the plantation and
commodity sectors (MPIC, 2015). Although the sector receives hardly any direct financial
government assistance in terms of subsidies, the government has set in place a considerable
institutional infrastructure to support the development of the sector.
The main governmental agency is the Malaysian Palm Oil Board (MPOB), which was
established in 2000, taking over the function of the preceding Palm Oil Research Institute of
Malaysia and the Palm Oil Registration and Licensing Authority. The MPOB focuses on research
and development to support both upstream and downstream operations. Its activities are
financed by a research cess for every tonne of crude palm oil which producers are required to
pay.
Palm oil and rubber together have been identified one of the 12 National Key Economic Areas
of Malaysia’s Economic Transformation Programme (ETP), launched in 2010 to assist Malaysia
in achieving its goal of reaching high-income status by 2020. Eight entry point projects to
promote the palm oil sector have been identified.
At the upstream level, the focus is on raising worker productivity, increasing the oil extraction
rate, and accelerating the replanting of palm oil. The Government committed over US$ 135
million in 2013 to jump-start a national oil palm replanting programme targeting smallholder
producers in the western and eastern provinces. In addition, it is assumed that privately held
commercial palm oil companies will also replant upwards of 100,000 ha per annum, resulting
in a net 200,000 ha per annum total replanting scheme. If this target is reached, Malaysia could
theoretically eradicate the backlog of old trees by 2018 and reignite the national palm oil yield
growth rate by 2020 (USDA, 2012a). Moreover, enhancing fresh fruit bunch yield is critical, as
yields have been stagnating over the past 7 years, due to adverse weather, ageing trees, plant
disease, and restrictive government labour and immigration policies (USDA, 2012a; USDA,
2014c). The latter aspect touches upon the labour shortages faced by the palm oil industry.
Since palm oil is labour intensive, the country depends to a large extent on migrant labour
from other Asian countries, with 21 percent of labourers on palm oil plantations being
seasonal immigrants. Both government and plantation companies are therefore working on
policies to mitigate the labour shortages (USDA, 2012a).