economic feasibility of organic palm oil production in...

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ECONOMIC FEASIBILITY OF ORGANIC PALM OIL PRODUCTION IN MALAYSIA

Ahmad Borhan A Nordin*;Mohd Arif Simeh*;Mohd Nasir Amiruddin*;Chan Kook Weng* andBurhanuddin Abdul Salam*

* Malaysian Palm Oil Board,P. O. Box 10620,50720 Kuala Lumpur,Malaysia.

INTRODUCTION

Organic agriculture refers toholistic management systemswhich promote and improve agroecosystem health, includingbiodiversity, biological cycles andsoil biological activity. Itemphasizes the use of locallyadapted systems such as cultural,biological and mechanical methodsin preference to off-farm inputs orany synthetic materials to fulfilspecific functions within thesystem (Malaysian Standard,2001). Organic procedures involveintegrated management of land,crops and animals that aims toachieve optimal agro ecosystemswhich are socially, ecologically andeconomically sustainable.

The importance of organicfarming has developed significantlyin the last decade due to its

environmentally friendly methodsand growing consumer awarenessin food safety. Consequently,agricultural producers the worldover have shown interest in suchfarming systems which are likely tobe supported by governments andinstitutional bodies.

MARKET DEVELOPMENTS

World organic food consumptionhas grown at a rate of 25% perannum in the last decade and isexpected to reach 15% of total foodconsumption in 2005 (Minou andWiller, 2003). The aggregateworldwide market for organicfoods based on the size of the retailmarket was estimated at USD 19billion in 2001, an increase of 19%from the previous year, and isexpected to reach USD 29-USD 31 billion in 2005. It is a niche

ABSTRACT

The importance of organic farming has increased due to itsenvironmentally friendly methods and growing consumer awareness offood safety. Based on estimates, world retail sales of organic foods willreach USD 29-USD 31 billion in 2005. Producing palm oil by organiccultivation is highly possible in Malaysia since many oil palm agronomicpractices in the country already have minimum environmental impactsand are moving towards even more eco-friendly methods. The commandof a premium price is the main attraction for investment in organicfood production.

Economic Feasibility ofOrganic Palm Oil

Production in Malaysia

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OIL PALM INDUSTRY ECONOMIC JOURNAL (VOL. 4(2)/2004)

market, of about 1% to 3% of totalfood sales but is expected to keepon growing in the future.

The United States is the world’sbiggest organic food market at USD9.5 billion in 2001 with annualgrowth rates of 15%-20% andestimated to reach USD 11-USD 13billion in 2003. The Europeanmarket was estimated to be aboutUSD 9 billion in 2001 withdifferent situations for eachmarket. Some markets for organicfoods, such as Denmark andGermany, have stagnated, whileothers, like United Kingdom,Netherlands and Switzerland, arestill growing. Based on marketdevelopment with estimatedannual growth rates from nil to20%, retail sales are expected tototal USD 10-USD 11 billion in2003. Top selling categories oforganic products comprisedapproximately 40% of freshvegetables and fruits, followed bynon-dairy beverages, breads andgrains, packaged foods and dairyproducts.

Currently, crude organic palmoil comes from Africa and LatinAmerica with processing done inthe importing countries. Organicpalm oil can become an importantvalue-added attribute in variousfood preparations, particularlysnacks, confectioneries, bakeryproducts and baby foods. Thepotential demand for organic palmoil will be driven by the marketdevelopment of organic foods inthe future, which is likely to beinfluenced by the demand for saferand healthier foods, and also betterenvironment conservation.

OBJECTIVES

This paper attempts to provideinformation on the economicviability of producing crude palmoil through cultivation techniquesand processing methods thatconform to organic procedures. Thescope of this study encompasses the

production of organic fresh fruitbunch (FFB) at the field level,followed by processing of the FFBat the mill.

METHODOLOGY

Methodology

The methodology used is basedon cash flow analysis of the extraincome generated by theinvestment. A 25-year cash flowover the oil palm productive life isused to determine the costs andproduction figures for organic andconventional farming. Theappropriate cost structure fororganic farming was derived fromthe conventional cost structure,followed by comparison offinancial costs and returns withdifferent yields and prices.

Technical information isgathered from visits to experts,supplemented by reviews of theirstudies, while related costinformation is compiled frominvestigations in local outlets andby telephone or e-mail enquiries tothe relevant suppliers. Additionalinformation was gathered from avisit to a local estate itself astudying organic agriculture for oilpalm.

The model assumes 5000 ha ofoil palm producing both palm oil(CPO) and palm kernel (PK). Thearea is divided into 2500 ha ofconventional farming and the other2500 ha under organic productionwith a dedicated processing mill of10 t FFB/hr capacity for eachsystem. The oil palms are plantedat 148 palms/ha and start bearingin year three, based on the yieldprofile of advanced DxP seedlings.

The financial costs and returnsevaluation uses the cost-benefitanalysis (CBA) approach thatincludes several measurementsfrom the project, such as netpresent value (NPV), internal rateof return (IRR) and benefit-costratio (B-C ratio).

Assumptions

A number of assumptions arerequired to facilitate the evaluationof financial performance by boththe organic and the conventionalmethods. These assumptions maynot apply to every situation sinceestablishment and productionpractices may vary significantlyfrom estate to estate and mill tomill. The assumptions are:

Assumptions on use of fertilizers.Fertilizer is a very important inputand one of the highest cost itemsin oil palm cultivation. Nochemical fertilizers must be used.

Various organic fertilizers suchas POME sludge cake, decantersolids, sheep or chicken dung,tapioca and sago waste are availablein the market. The prices rangebetween RM 300 to RM 4000/tdepending on their materials formwhether powder, granules orpellets and nutrient content.Organic fertilizers are invariablylow in nutrients (N: 2%-3%, P:0.3%-0.6%, K: 2%-3%, Mg: 0.4%-0.5%), thus larger quantities areneeded to provide enoughnutrients. This escalates the cost ofproduction. About 6 t/ha/yr oforganic fertilizers arerecommended by one of the localsuppliers for oil palm. This willcost approximately three to fourtimes higher than that forconventional oil palm cultivation.

Studies on the utilization of oilpalm by-products such asmulching with pruned fronds,empty fruit bunches (EFB) andpalm oil mill effluent (POME) asreplacement for chemical fertilizershave been done extensively withencouraging outcomes. Table 1shows the various nutrientcontents that can be obtained froma hectare of oil palm.

Composition analysis of EFBreveals that 1 t of EFB (freshweight) has the fertilizer equivalentof 7 kg urea, 2.8 kg rock phosphate,

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19.3 kg muriate of potash and 4.4kg kieserite (Singh et al., 1999).The interaction between EFBapplication and chemical fertilizeron inland soil improves oil palmgrowth and increases yield by upto 75% (Singh et al., 1999), whileon coastal soil, the responsedepends on the type of alluvium.After taking into account thetransport costs for the EFB, thesavings in fertilizer can reachRM 142 ha or 28% less than theprior cost (Nasir, 2001).

Practically, EFB is applied in acircular band at about 15-30 t/ha/yr for newly planted and immaturepalms, and about 25-40 t/ha/yrspread in the avenues or placed inheaps between mature palms oncoastal soils and 35-70 t/ha/yr oninland soils. EFB is highlyrecommended by agronomists tobe spread in a single layer becauseit can cover a larger root area,prevent weed growth, keep the soilmoist and also minimize breedingof the rhinoceros beetle. The costof EFB application can range fromRM 3.50 to RM 10/t depending on

the transport used, distance fromthe mill and method of in-fielddistribution (Singh et al., 1999).

Another source of nutrients ispruned palm fronds which arestacked in between palm rows.This practice can help reduce soilerosion when placed acrossharvesting paths and alongcontours and also increase the rootconcentration under the decayingleaves that supply lots of nutrients.Previous studies have shown thatapplication of POME per se as analternative to inorganic fertilizersprovides many benefits to thecultivation of oil palm such as acost-effective approach in wasteutilization and substantial savingsin fertilizer costs, improve palmgrowth and yield with negligibleeffects on the environment (Singhet al., 1999), and also increase thesoil nutrients and moisture levelneeded by oil palm. POME is amixture of sterilizer condensate,separator sludge and hydrocyclonewastewater which, in both raw andtreated forms, contains high levelof nutrients. Its application on land

is allowed with the prior approvalof the Department of Environment,Ministry of Natural Resources andEnvironment. The frequency ofPOME application for mature oilpalm should be spread out to noless than three rounds a year andeach application should not exceed2.5 cm rain equivalent per year,while for immature palms theamount should be lower (Zin et al.,2000). Table 2 shows the estimatedcapital and operating costs for thevarious land application systems.In this exercise, the tractor, tankerand pump system is used to applytreated POME in the field.

Planting of legume covers duringthe immature phase, which is astandard oil palm cultivation practice,to check soil erosion and reduce weedcompetition can also be anothersource of fertilizer, particularly Nfertilizer. Legumes like Centrosemapubescens, Muchuna cochinchinesis,Peuraria javanica, Calopoganiummucunoides, Calopogonium caerulumand Phaseolus calcaretu are recognizedfor their nitrogen fixing capacity. Twomajor benefits from legumes includesavings in nitrogen fertilizers andimprovements in the soil physicalproperties (Chan, 1992).

Another approach to replenishsoil organic matter and enhance itsfertility is the zero burn or no-burntechnique for land clearing. Besidescontributing to a cleanerenvironment and abiding by the law,its benefits include earlier fruiting,lower fertilizer requirements due tothe large quantities of nutrientsbeing recycled to the soil where theorganic matter is biodegraded, anda higher return compared to cleanburn (Singh et al., 1999; MohdNoor, 2003).

In this exercise, the applicationof 6 t/ha/yr of organic fertilizers isestimated to cost three times morethan the conventional cost duringimmature years, and it is assumedthat they can provide the nutrientsrequired by the oil palms. The costwill be reduced approximately by

TABLE 1. NUTRIENTS CONTENTS IN BY-PRODUCTS OBTAINEDFROM A HECTARE OF OIL PALM (kg/ha/yr)

Part of palm N P K Mg Ca

Annual pruning 107.9 10.0 139.4 17.2 25.6Empty bunches 5.4 0.4 35.3 2.7 2.3Fibre 5.2 1.3 7.6 2.0 1.8Shell 3.0 0.1 0.8 0.2 0.2Effluent (raw) 12.9 2.1 26.6 4.7 5.4

Source: Tarmizi (2000).

TABLE 2. LAND APPLICATION SYSTEM AND RELATED COSTS

Land application Capital cost Operating costsystem (RM/ha) (RM/ha/yr)

Longbed 1 200 – 1 700 180 – 220Flatbed 1 300 – 1 800 180 – 240Furrow on sloping land 1 500 – 1 800 200 – 240Furrow on flat land 750 – 1 250 175 – 250Sprinkler 1 800 – 3 120 240 – 310Tractor/tanker/pump 320 – 380 90– 110

Source: Singh et al. (1999).

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30% when EFB and POME areintroduced to the field. Overall, theright combination of organicfertilizers, EFB and POMEapplication, if implementedcorrectly under the guidance ofagronomists, can be as effective aschemical fertilizers.

Assumptions on weeds control. Fororganic cultivation, culturalpractices such as the planting ofcover crops or beneficial plants andalso EFB mulching can be used tosuppress the growth of weeds, aswell as reduce soil moistureevaporation. Manual weeding ormechanical weeding using theappropriate machines can be usedfor weed control. For instance,tractor-drawn service cutters cantrim the weeds along theharvesters’ path on flat terrain,while regular desilting using arotary (dondi) ditcher can controlweeds in the field-drains in coastalplanting (Singh et al., 1999).

Biological control by integratedfarming with ruminants, especiallycattle, can substitute for manualweeding whereby 150 cows canreplace four men to save weedingcost of RM 30 to RM 50/ha/yr(Rosli, 2000) or reduce theplantation-weeding cost by 17% to38% (Jusoh and Mohd Noor,2002). Furthermore, it providesanother source of organic fertilizer,plus additional revenue throughthe sale of livestock.

Application of mechanical ormanual controls during theimmature years is inevitable sincebiological control cannot beimplemented. Since both controlsare costly as experienced by thelocal estate studying organicpractices, the weeding cost inorganic farming is estimated to beabout 4.5 times higher than that forthe conventional one. Althoughintegration with animals is highlyrecommended in organic systems,it is excluded in this exercise inorder to evaluate the investment

return from producing organicpalm oil only.

Assumptions on pests and diseasescontrol. Organic farming systemsbalance the beneficial organismsagainst the pests, not seek toeliminate pests in toto . Theapplication of chemicals for controlis strictly prohibited.

Conservation of plants that arehosts to beneficial insects andparasitoids or are pest-resistant isalso applauded in organiccultivation. The planting of covercrops or natural vegetation to coverbreeding sites can also suppress thebeetle population. Beneficial plants,such as Cassia cabanensis, Crotalariausaramoensis, Asystasia intrusa andEuphorbia heterophylla, prolong thelives of beneficial insects (Singh etal., 1999), thus balancing the pestswith their predators. Cassiacabanensis, a leguminous crop, ishost to more than 300 bagwormparasitoids, and thus suppressesMetisa plana (Mohd Basri andNorman, 2002). Establishment ofother nectariferous plants, such asEuphorbia heterophylla orAntigonon leptopus, in open areascan also control pest outbreakseffectively (Singh et al., 1999).Other forms of biological controlor predation practiced include thebarn owl for rat control, while theuse of B. thuringiensis forlepidopterma control hasincreased. The release of predatorsperiodically has been practicedcommercially to control leaf-eatingcaterpillars in some plantations(Singh et al., 1999).

Strict monitoring on the estatesite is also important for noting anypest or disease outbreaks. Earlydetection of some pests can be aneffective measure, so that theappropriate action can be takenquickly before the populationreaches a level that causeseconomic injury to the investment.Table 3 shows the thresholdnumbers of pests (from previous

studies) beyond which theircontrol is difficult.

Pesticides from natural sourcesor biopesticides, have beendeveloped locally and abroad. Astrain of Metarhizium anisopliaefound by MPOB is effective incontrolling O. rhinoceros larvae(Ramle et al., 2001). Since it is stillnot widely available in the market,the price of M. anisopliae is higherthan those of the chemical controls- approximately RM 150/kg ascompared to Carbuforan andCypermethrin at RM 4.50/kg andRM 9.50/litre, respectively.However, its application is easierand has a long lasting residue ofabout three months in the field. Inaddition, its application costinclusive of labour and equipmentis estimated to be less than that forchemical control.

Pheromone trapping, allowableunder organic farming, can be usedto minimize the population ofadult rhinoceros beetles (Normanand Mohd Basri, 2000). Trappedbeetles may be infected withbaculovirus of Oryctes orM. anisopliae before release back tothe field to spread the virus andfungus. If the population ofO. rhinoceros beetle is still high,then mechanical control bypulverization of the area may benecessary.

Cultural practices such as deepploughing can be useful in areaswhere Ganoderma boninensis thatcauses basal stem rot is prevalent.All biomass leftovers should bepulverized and spread thinly inalternate avenues. Based on theaverage cost of production, pestand disease control constitutesabout 3% of the upkeep andcultivation cost and only less than1% of the total cost of production.Since the proportion is so low, thecost for pest and disease control inthe organic production system isexpected to remain the same as forthe conventional one.

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Assumptions on labour. Organicfarming requires more labour ormechanization for upkeep andmaintenance. However, thenumber of workers in theseactivities constitutes only a smallportion of the labour force in theplantation. On the whole, thelabour cost in organic farming isestimated to be higher by 10% to20% than conventional farming byhiring more workers or by payinghigher wages due to more work tobe done in the field. Therefore,from the social perspective, organicfarming can provide moreemployment in the estate and alsoelevate the standard of living ofplantation workers through betterincome.

Assumptions on yield. Basically, ifadequate nutrients are applied tothe crop either through organic orconventional farming, the yield forboth methods will be the same.

Previous trials on POMEapplication (Table 4), although insmall scale, have proved that it can

increase yield by 2% to 27%, whilestudies on EFB application (Table5) demonstrated that yield can beincreased 1% to 75% depending onthe type of soil. The application ofPOME and EFB is not just toreduce the amount of organicfertilizers and the cost ofproduction but also to increase theFFB yield.

In the analysis, the yield oforganic oil palm is expected tomatch the conventional one asshown in Figure 1 with the sameyield profile as enough nutrients areprovided even though the cost israther high. The yield profile isplotted based on data from theBiology Division of MPOB (Azmanand Mohd Noor, 2002).

TABLE 3. ECONOMIC THRESHOLDS OF IMPORTANT PESTS OF OIL PALM

Common name Scientific name Economic threshold Reference

Bagworm Metisa plana 10 larvae/frond Wood (1971)Pteroma psendula 30-60 larvae/frond IRHO (1991)Metisa plana 8-47 larvae/frond Basri (1993)Mahasena corbetti 5 larvae/frond Wood (1971)

Nettle Darna trima 10 larvae/frond Wood (1971)caterpillar 30-60 larvae/frond IRHO (1991)

Setora nitens 5-10 larvae/frond IRHO (1991)Darna diducta 10-20 larvae/frond IRHO (1991)Setothosea asigna 5 larvae/frond Hoong and Hoh (1992)

Rhinoceros beetle Oryctes rhinoceros 10% palms with damage Wood (1968b)3-5 adults/ha IRHO (1991)

Bunch moth Tirathaba rufivena 30% of the palms with at leastone bunch >50% attacked inyoung plantings and 60% inolder plantings IRHO (1991)

Cockchafer Adoretus 5-10 adults/palm IRHO (1991)Apogonia 10-20 adults/palms IRHO (1991)

Rat Rattus spp. < 20% bait acceptance Wood (1968a)20% bunches with damage Cheong, S P (per. Comm.)

Source: Yusof et al. (2001).

TABLE 4. STUDIES ON POME APPLICATION

System Soil Duration % Referencetype (yr) Increase

Sprinkler Inland 3 19 Lim et al. (1983)Sprinkler Coastal 4 18 Lim (1987)Tractor/tanker Inland 3 12 Tam et al. (1982)Tractor/tanker Coastal 5 10 Trial by Golden

Hope PlantationsFurrow Coastal 5.5 27 Trial by United

PlantationsFlatbed Inland 6 20 Lim (1987)Longbed Coastal 2 15 Trial by Sime

Darby PlantationsTractor/tankerand flatbed Inland 4 2.3 Khalid Haron and

Zin (1994)Source: Singh et al. (1999).

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Assumptions on processing andtransportation. Processing the FFBcan be done through variousmethods, namely, mechanicalscrew-press, basket and bowlcentrifugation, wet process, solventextraction, etc. For organic palmoil production, screw-pressingfollowed by clarification in settlingtanks and centrifugation can beemployed for oil extraction. It is asimple method, able to handle highthroughputs without anychemicals and accepted worldwide.So, the cost of processing organicFFB is assumed to equal theconventional one.

The organic palm oil integritymust be maintained during storage,transportation and handling. Itmust be protected either frommixing with non-organic productsor contact with intolerablematerials and substances. Evenstorage areas and transportcontainers previously used for non-organic palm oil must be cleanedusing methods and materialspermitted in the handling oforganic products.

The transport cost is expectedto be higher because more transportis involved in organic farming suchas moving EFB and POME to thefield and transport of labour aroundthe estate.

Assumptions on price. The price oforganic palm oil will depend ondevelopments in the organic edibleoil market. Basically, a premium isexpected for products traded inniche markets since they havespecial characteristics or attributesthat can fetch a higher price ascompared to normal products.Table 6 shows the prices of organicoils, which are approximately twicethose of conventional oils exceptfor olive oil.

However, any investment in anorganic system that depends on thepremium alone should becautioned against because theusual demand and supplymechanism would tend to forceprices down over time and reducethe premium as experienced by theEuropean market. In this analysis,the price of conventional palm oilis assumed to be RM 1000/t andthe price of palm kernel RM 500/t.Considering the premium, the priceof organic palm oil is estimated tobe 50% higher than theconventional one, at RM 1500/t.

Inspection and certification system.A food can only be labelled organicif it had been produced inaccordance with organicproduction and processingstandards and verified bydesignated authorities. The organicclaim is allowed for products thatcontain only organic ingredients,with a tolerance of 5%. Thesestandards are to protect the rightsof organic producers and to ensureconsumer confidence in buying acertified organic product.

The certification proceduresinclude inspection and verificationof the agricultural practices at thefarm, processing operations andconditions at the mill. Anagriculture product, especiallyfrom a perennial crop may take aslong as three years before it can becertified organic. During theprobation period, it can only belabelled as transition to organic.

Organic certification isgoverned by a set of international

TABLE 5. STUDIES OF EMPTY FRUIT BUNCH APPLICATION

Soil series % Increase Reference

Inland Rengam 20 Chan et al. (1993)Malacca 75 Lim and Chan (1990)Durian 12 Chan et al. (1993)Tavy 16 Chan et al. (1993)

Coastal Lunas 19 Gurmit et al. (1990)Briah 1.09 Loong et al. (1988)

Source: Singh et al. (1999).

TABLE 6. PRICES OF ORGANIC AND CONVENTIONAL OILS (USD)

Oil Conventional Organic

Soyabean (5 gal pail @ 38.5 lb pail) 27.00 40.00Canola (5 gal pail) 35.20 70.00Extra virgin olive oil (5 gal pail) 75.50 99.30Sunflower (5 gal pail: 35 lb pail) 34.00 72.65

Source: http://edibleoils.net

Figure 1. Yield profile of fresh fruit bunch.

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Year

t/ha

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standards covering organicproduction and its subsequenthandling and processing.Certification of the product can beobtained whether through localcertification bodies, internationalentities or a partnership betweenthese bodies.

The certification cost isestimated to be RM 20 000 toRM 35 000 annually based on thescale of operation, inclusive ofinspection, certification, a one yearlicense and access to supportservices. Additional charges mayapply depending on the expenses,location and time required forthese activities.

ESTIMATION OF THEESTABLISHMENT AND

UPKEEP COSTS

The establishment and upkeep costcomponent comprises non-recurrent costs, maintenance costsand upkeep costs. Table 7 comparesthe establishment cost for the firstyear between conventional andorganic farming. In total, the firstyear establishment cost for organicfarming is RM 4490/ha, or 44.6%higher than the RM 3110/ha forconventional farming. The extra ismainly due to higher fertilizer andupkeep costs, especially forweeding.

The cost of cover crops isexpected to be much higher, i.e.twice that of conventional farming,

because it also includes otherbeneficial plants that will playmajor and multiple roles in theorganic system. The higher costalso acts as proxies for itsimportance in the system bycreating and maintainingbiodiversity and biological cycle ofthe oil palm plantation.

The average cost for producingFFB organically throughout theinvestment period is estimated atRM 193/t as compared to RM 116/t by the conventional system, whilethe average cost of producing 1 tof organic CPO is about RM 935/t,which is higher than that forproducing non-organic palm oil atRM 626.35/t.

RESULTS AND DISCUSSION

The feasibility for investment isanalysed at a discount rate of 10%over 25 years. For conventionalfarming, CPO and palm kernelprices are fixed at RM 1000 andRM 500/t, respectively. The priceof organic palm oil is estimated atRM 1500/t, while the price of palmkernel remains constant, so thatthe outcome of the investment willshow solely the impact of organicpalm oil.

The result shows thatproducing palm oil throughorganic farming can be a viableproposition because of itscapability to generate a NPV ofRM 32.6 million, about RM 8.6million higher than that by theconventional system, and producea B: C ratio of 1.17, which is higherthan unity. However, the IRR isonly 16.8%, less than that fromconventional farming of 17.4% andthe payback period is longer by ayear, i.e. eight to nine years ascompared to the conventionalseven to eight years (Table 8).

Scenario and Sensitivity Analysis

The premium is an influentialfactor in determining the

TABLE 7. ESTABLISHMENT AND UPKEEP COSTS,FIRST YEAR (RM/ha)

Item Conventional Organic

Non-recurrentFelling and clearing 724 724Terracing and soil conversation 215 215Roads, bridges, paths 175 175Drains 134 134Survey, lining, holing and planting 189 189Planting material 666 666

Sub total 2 103 2 103

MaintenanceRoad, bridges, paths, etc. 70 70Drains 50 50Terraces 50 50Soil/water conservation 40 40Boundaries and survey 30 30

Sub total 240 240

UpkeepWeeding and lallang control 219 984Cover crops and beneficial plants 169 338Pests and diseases 54 54Pruning 20 20Census and supply 24 24Other costs of upkeep 54 54

Sub total 540 1 474

Fertilizers 227 681

Total 3 110 4 498

Total (exclude non-recurrent costs) 1 007 2 395

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profitability of organic productionin view of the higher productioncosts. However, the advantage willslowly disappear as more and moreorganic edible oils enter themarket.

Table 9 shows that when theprice of organic palm oil isRM 1000/t, the return toinvestment is inferior toconventional production. TheNPV shows a deficit with an IRRof only 4.9%, B:C ratio less thanunity and a payback period of 14to 15 years. Therefore, a significantpremium is required to ensure theviability of producing palm oilthrough the organic system.

Further analysis shows that theperformance of organic farming isat par with conventional farmingwith an IRR of about 17.4% if theprice of organic palm oil isapproximately RM 1535/t, or53.5% higher than that for theconventional oil. If the price oforganic palm oil follows the price

pattern of organic soybean oil, i.e.twice higher than the conventionalone, or RM 2000/t, then the returnis far greater (Table 9).

Table 10 shows the economicperformance of organic farmingif the organic FFB yield declinedby 10% and 20% at a price of RM1500/t. The result demonstratesthat if the FFB yield decreases by10%, the IRR is lower at 13.9% butthe B:C ratio is still higher thanunity.

The investment is stilleconomically sound with positivenet return and payback period of 9to 10 years. But, if the yielddecreases by 20% or more, then theeconomic viability of organicproduction cannot match theconventional one.

CONCLUSION

Organic products are gainingacceptance by consumers indeveloped countries and are

making progress in producingcountries worldwide. Productionof organic palm oil is anotheropportunity for the Malaysianpalm oil industry to diversify palmoil products. Extensive studies onagronomic practices related toenvironmental friendly practiceshave been done and can facilitateconversion to organic oil palmproduction. Technical assistancecan be sourced from authoritativeor relevant bodies.

Evaluation of viabilityaccording to the cost structure usedrevealed that producing organicpalm oil can be profitable if itcommands a substantial premiumand its yield equals theconventional yield. Organicproduction with a 50% premiumcan generate an IRR of 16.7% withNPV and B:C ratio slightly higherthan those of the conventional one.Even a reduction in yield by 10%still provides a good return toinvestment although somewhatinferior to that for conventionalproduction.

The returns from organic palmoil can be further improved byreducing the production cost of,which is mainly increased by thehigher costs of organic nutrientsand upkeep. A higher FFB yieldcan be obtained by EFB mulching

TABLE 8. COST-BENEFIT ANALYSIS

Parameter Conventional Organic

Net present value (NPV) RM 24 073 437.36 RM 32 567 978.33Internal rate of return (IRR) 17.4% 16.8%Benefit cost ratio (B:C) 1.16 1.17Payback period 7 – 8 years 8 – 9 years

TABLE 9. COST-BENEFIT ANALYSIS WITH PRICE VARIATIONS

Price (RM/t) 1000 1535 2000

Net present value (NPV) (RM 18 598 854.68) RM 36 149 656.65 RM 83 734 811.35Internal rate of return (IRR) 4.9% 17.4% 25.0%Benefit cost ratio (B:C) 0.78 1.20 1.56Payback period 14 - 15 years 7 – 8 years 6 – 7 years

TABLE 10. COST-BENEFITS ANALYSIS WITH YIELD VARIATIONS

Parameter Yield reduce by 10% Yield reduce by 20%

Net present value (NPV) RM 17 676 383.25 RM 2 784 788.17Internal rate of return (IRR) 13.9% 10.7%Benefit cost ratio (B:C) 1.07 0.96Payback period 9 – 10 years 10 – 11 years

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and POME application as has beenproven. Besides that, these by-products can reduce the fertilizercost and improve the soilcondition. The co-product oforganic palm oil, i.e. organic palmkernel with its potential organicproducts, will boost the prospectsfor the investment. Furthermore,integration with livestock andintercropping can provideadditional benefits.

REFERENCES

AHMAD TARMIZI MOHAMMED (2000). The fertilizer management ofoil palm. 9th Oil Palm Plantation Management Conference. MPOB, Bangi.

AZMAN ISMAIL and M MOHD NOOR (2002). The optimal age of oilpalm replanting. Oil Palm Industry Economic Journal Vol. 2 No. 1: 11-18.

CHAN KOOK WENG (1992). The Manuring of Oil Palm Elaeis guineensisJacq: the Advances in Fertilizer Effiency and their Effects on Yield and Cost.Ph.D thesis. p. 1-171.

JUSOH LATIFF and M MOHD NOOR (2002). A financial study of cattleintegration in oil palm plantations. Oil Palm Industry Economic JournalVol. 2 No. 1: 34-44.

LIM, C H; SINGH, G and LIM, K H (1999). Production of organicfertilizers and soil conditioners. Oil Palm and the Environment - aMalaysian Perspective. p. 185-197.

LIM, K H; MOHD HASHIM, T; ZIN Z ZAKARIA; GURMIT SINGH andLIM, C H (2000). Land application of palm oil mill effluent. Oil Palmand the Environment - a Malaysian Perspective. p. 153-169.

MALAYSIAN STANDARD (2001). The Production, Processing, Labellingand Marketing of Plant-Based Organically Produced Foods. p. 1-30.

MINOU YUSSEFI and HELGA WILLER (2003). The World of OrganicAgriculture 2003 - Statistics and Future Prospects.

M MOHD NOOR (2003). Zero burning techniques in oil palm cultivation:an economic perspective. Oil Palm Industry Economic Journal Vol. 3No. 1: 16-24.

MOHD BASRI WAHID and NORMAN KAMARUDIN (2002). Cassiacobanensis as a beneficial plant for sustenance of parasitoids in bagwormcontrol. MPOB TT No. 132: 2 pp.

Finally, the intangible benefit ofproducing palm oil throughorganic farming is really enormousin terms of building up the imagefor environmental-friendly palmoil products from the Malaysianpalm oil industry.

ACKNOWLEDGEMENT

The authors wish to thank theDirector-General of MPOB for

permission to carry out this study.Appreciation is also accorded to MrR Venugopal, Mr Malek Mansoor,Dr Zin Zawawi, Dr NormanKamaruddin, Dr Colin Barlow ofANU, Mr Chew Poh Soon, MrZahari of Golden Hope and MrKerby Ho of Zenxin Agri-OrganicFood for their cooperation andcomments.

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economic feasibility of organic palm oil production in...

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