Besides dealing with the mounting pressure of having another minimum wage hike in the upcoming Budget 2025 announcement, we could also expect some reforms in the windfall profit levy on palm oil and additional allocations for the oil palm replanting programme. On a separate note, it was reported that the European Commission has suggested a 12-month delay to the implementation of European Union Deforestation Regulation that is aimed at curbing deforestation-linked commodities, which we believe it is a huge relief for the global vegetable oil markets. Maintain Neutral on the sector outlook with a full-year CPO forecast of RM3,800/mt.

• Proposals by the Ministry of Plantation and Commodities. There are two key proposals to be considered for inclusion in Budget 2025, namely, a revision of the windfall profit levy on palm oil and additional allocations for oil palm replanting programme to address the longer-term challenges for the industry.

• Time to reform the windfall profit levy framework. The windfall profit levy, which is defined as a levy imposed on a company or industry when economic conditions result in large and unexpected profits, has been applied on the FFB producers when CPO prices are RM3,000/mt in Peninsular and RM3,500/mt in East Malaysia. There are calls to either abolish or increase the windfall profit levy as the current levy structure is no longer viable today as increased production costs have caused the windfall margin to become virtually non-existent. The cost of producing one tonne of palm oil has surged from RM1,800 to RM2,800-RM3,000. In-short, the CPO price range of RM3,000-4,000 is now a normal trend in view of the current cost structure. We could see the windfall profit levy threshold raised to RM4,500/mt and above

• Huge incentives required for smallholders to push for full replanting. Malaysia’s Palm Oil Association estimated that 664,000ha or about 12% of the nation’s planted area is in the age group of 25 years and above, and subject to replanting. It is projected that over a third of the planted area could be classified as old by 2027 and far from revisiting the national long-term average FFB yield of 18m mt level if there is no prompt action taken in the near-term. Currently, there are about 1.5m ha of oil palm plantations managed by smallholders, which made up 26.4% of the total planted area in Malaysia. Based on the estimated replanting cost of RM20,000 per ha, the total cost involved for the entire old oil palm area would be approximately RM13bn. Assuming 175,296ha (26.4% of 664,000ha) of the nation’s old oil palm area belonging to the smallholders would require at least RM3.5bn to fully replant

Source: PublicInvest Research - 3 Oct 2024