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Indonesia, Malaysia to limit palm oil supply

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November 9, 2008

Indonesia, Malaysia to limit palm oil supply
Indonesian and Malaysia, which produce some 85 percent of the world's crude palm oil (CPO), will cut production in the short-term to help limit supply and prevent further falls in prices, reported local daily the Jakarta Post.

The production cut will be made starting next year through a replanting program covering a total of 300,000 hectares of oil palm trees from both countries, Agriculture Ministry's director general for plantations, Achmad Mangga Barani, was quoted as saying Friday.

The replanting means felling still-productive but old trees to be replaced later by new seedlings. The program will then freeze production in replanted areas until the new trees start producing crude palm oil in the fourth year.

Achmad said the agreement between the two nations has been signed by Minister Anton Apriyantono and Malaysian counterpart Peter Chin, with the aim of anticipating oversupply amid falling demand.

"Demand is projected to slow down in every sector next year as a result of global recession. We're preventing a possible oversupply of palm oil that may occur next year by replanting trees," he said.

"This hopefully will help boost the palm oil price to a normal level -- at around $700 to $800 per metric ton," he added.

Palm oil prices in Malaysia touched a three-year low of 1,331 ringgit (around $376) a ton on October 28, Bloomberg reported.

The two countries together produce around 85 percent of the world's CPO and account for 88 percent of global CPO exports.

Indonesia alone produces 18.5 million tons of CPO per annum on a total of over 6 million hectares of plantations, according to Indonesian Oil Palm Association (Gapki) chairman Akmaluddin Hasibuan.

This agreement, is the country's second move to anticipate oversupply of a commodity next year, after Indonesia, Malaysia and Thailand jointly agreed last Wednesday to cut rubber production by 210,000 tons next year, also by felling trees.

The three counties make up 70 percent of global rubber output.

On the CPO, according to Achmad, Indonesia will replant 50,000 hectares of oil palm trees owned by local farmers and Malaysia 250,000 hectares.

"Indonesian farmers will receive interest subsidies if they want to replant their trees," he said.

He said Indonesia and Malaysia expected to cut palm oil output by 75,000 tons and around 500,000 to 600,000 tons, respectively, next year.

Over a longer period until 2011, Achmad said, the country planned to replant a total of 125,000 hectares of oil palm trees.

He emphasized that the government's replanting program was a short-term solution because "CPO demand will be high in the next few years as European Union countries mandate the use of 20-percent CPO in fuel and our country mandates 10 percent".

Akmaluddin of Gaoki said he was encouraged by the move, but warned that replanting was "costly", saying that replanting oil palm trees needed around Rp 25 million ($2,253) to Rp 27 million per hectare.

"The liquidity in banks is drying up now. Replanting may not be a problem for big companies, but it may be for local farmers. There should be an agreement between local farmers and the government to make it easier for them to get loans."

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