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November 24, 2008

Price crash hits small palm oil farms
The global economic slowdown has sent palm oil prices crashing, spelling misery for countless smallholders who have been forced to watch their harvests rot on the trees, reported AFP.

Hundreds of thousands of farmers in Indonesia and Malaysia, which produce 85 percent of the world's palm oil, are reliant on the industry which has gone from boom to bust in just a few months.

Palm oil prices have plummeted from a March high of 4,486 ringgit ($1,248) per tonne to less than 1,500 ringgit, due to the financial crisis and the falling price of crude oil -- which reduces demand from the biodiesel industry.

Malaysia's deputy commodities minister Kohilan Pillay said today's prices were close to the production costs of most smallholders, squeezing their earnings and pushing them to the brink of bankruptcy.

Oil mills are causing further hardship by flouting laws that require them to buy fruits from smallholders, whatever the going rate, he said.

"Their excuse is that it is not economical for them to process CPO (crude palm oil) at this time as prices are too low so they just shut down production," Pillay told AFP.

"Many are waiting for the prices to hit rock bottom before purchasing and this is a problem as the fruits are perishable and so these independent smallholders end up with rotting, unprocessed fruits which they cannot sell."

Smallholders or independent oil palm farmers account for about 30-35 percent of Malaysia's total palm oil output and around 25 percent of Indonesia's production.

"The bigger companies can sustain themselves even if prices fall below 1,000 ringgit per tonne but it is the smallholders who suffer the most," Pillay said.

In Indonesia, the government is under pressure to help independent farmers who face big losses.

"At present, oil palm growers are on the brink of bankruptcy in the wake of the sharp drop in the price of oil palm fruit bunches," Yulman Hadi from the West Sumatra Legislative Assembly told the state Antara news agency in October.

"Rescuing the growers from bankruptcy needs serious handling at the national level," he said, warning that the loss of revenue could create a ripple effect in the region's economy.

Achmad Ya'kub from the Indonesian Peasants Union said smallholders were facing the same kind of problems as their counterparts in Malaysia.

"The big CPO companies that also own plantations prioritise buying palm oil from their own plantations, so the smallholders are really having a hard time selling their stuff," he said according to Antara.

Reports from Malaysia's Sabah state on Borneo island, an important palm oil-growing district, indicate that rural families are already being hit hard by the price slump.

"These families have been suffering for the past two months. The federal or state government has to do something," said lawmaker Bung Mokhtar Radin, adding that just a few months ago farmers were making up to 600 ringgit per tonne.

"The last I heard, processing mills were willing to pay 190 ringgit per tonne, that is if they are buying any fruit at all. For the smallholders, this is a money-losing proposition," Bung Mokhtar told the Star newspaper.

Malaysia and Indonesia have announced plans to reduce supply by using the slump as an opportunity to replant old trees, and bolster demand by mandating the use of biodiesel.

Malaysia has also scrapped an import duty on fertilisers and plans to further cut fertiliser prices by 15 percent to reduce production costs.

The hard times are here to stay, according to CLSA Asia-Pacific Markets, which has slashed its 2009 price forecast by 46 percent to 1,000 ringgit (278 dollars), saying that measures to cut production will not be effective.

But Buddhika Piyasena from Fitch Ratings had a less gloomy outlook, saying that prices had "pretty much bottomed out" and tipping CPO to trade in the 1,600 ringgit per tonne range in coming months.

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