Malaysia: economic transformation advances oil palm industry

By Choo Yuen May

In This Section

September 2012

Malaysia is currently the world’s largest exporter of palm oil although it is the second-largest producer of the oil after neighboring Indonesia. With a humid tropical climate and temperature ranging from 24°C to 32°C throughout the year, coupled with ample sunshine and an evenly distributed annual rainfall of around 2000 mm, Malaysia is now home to the West African palm first introduced to Malaysia (then known as Malaya) as an ornamental plant in 1875. Commercial planting of oil palm did not take place until 1917. The rapid expansion of oil palm in the 1960s was encouraged by the Malaysian government, which recognized its potential as a complementary crop to rubber.

The main palm product exported until the 1970s was crude palm oil (CPO). At that time taxation and incentive policies were introduced to encourage the export of refined palm products. The importance of the palm oil trade to the Malaysian economy was affirmed with the founding of the Kuala Lumpur Stock Exchange (KLCE) for price setting, hedging, and disseminating market information to reduce market risk in the trading of palm oil. Currently, Bursa Malaysia Derivatives Bhd. (BMD) is the sole exchange operator for the futures and options market in Malaysia, and the CPO Futures Contract is the flagship contract of the BMD launched in 1980 by the KLCE.

The most significant change/trend in the past year two years

Formerly, the industry was mainly concentrated on upstream activities such as cultivating palms for production of fruit bunches in plantations, processing fresh fruit bunches (FFB) in mills for CPO and palm kernel oil, producing refined palm oil (RPO) from CPO, and fractionating palm oil (both crude and refined) to obtain liquid olein and solid stearin fractions as well as oleochemical products. This traditional approach was changed when the Malaysian government introduced the Economic Transformation program (ETP) in September 2010. The ETP is a comprehensive effort that outlines a 10-year economic roadmap to energize Malaysia toward becoming a high-income nation by 2020. The implementation of the ETP gave the oil palm industry a new focus after it was identified as one of the 12 National Key Economic Areas (NKEA) to drive the nation’s economy. The palm oil sector NKEA is aimed at improving upstream productivity and increasing downstream expansion, while focusing on the sustainable development of the oil palm industry. To overcome regulatory restrictions and limited land bank for development of new plantations, the government will focus on downstream activities such as processed food, biodiesel, second-generation biofuel, oleo derivatives, and phytonutrients. Further, plantation owners will be encouraged to look farther afield for upstream expansion and to enhance productivity toward the targeted CPO yield of 6 metric tons per hectare per year (MT/ha/yr).

Production and exports

In 1920, Malaysia had a mere 400 ha under palm. This area increased to 0.6 million hectares in 1975 and to 5.0 million hectares in 2011 (Fig. 1).

FIG. 1. Oil palm planted area: 1975–2011 (million

In tandem with this increase in area of cultivated palm, Malaysia’s annual export of palm oil increased steadily from 1.17 million metric tons (MMT) in 1975 to 18 MMT in 2011 (Fig. 2).

Annual export of palm oil products, 1983–2011

The volume of 2010 and 2011 exports of various palm products is shown in Figure 3.

Various Palm Products

Palm oil accounted for 74.1% of the palm products exported in 2011 (Fig. 4). Approximately 19% of the palm oil exports is CPO, and the remainder is processed palm oil.. Breakdown of oil palm products exported in 2011The oil palm is the nation’s most valuable agricultural crop, with annual exports of palm oil and palm-based products valued at $27 billion in 2011—up from $21 billion (34.5% increase) in 2010. The highest export earnings on record were due to higher export prices when palm oil prices traded firmer and the CPO price increased by 19.2% to $1,056 per metric ton in 2011 compared to that in 2010. The increase was largely due to market sentiments that were driven by the impact of a heavy rainfall season that disrupted harvesting, as well as a tight palm oil supply situation.

Processed palm oil export prices also rose significantly, influenced by higher crude oil prices in 2011 vis-à-vis 2010. Collectively, the sum of palm oil, palm kernel oil, and other palm oil products is the fourth-largest contributor to the country’s economy, accounting for 8% of the Gross National Income (GNI) per capita. Malaysia exported 24.27 MMT of palm oil products in 2011, a 5.3% increase over the amount exported in 2010. The key importers of Malaysian palm oil are China People’s Republic, the European Union, Pakistan, India, and the United States (Fig. 5).


Key importers of Malaysian palm oil


Sustainable growth and competitiveness

World palm oil production more than tripled between 1995 and 2011, and increased demand for the oil has made significant contributions to the economies of Malaysia and Indonesia, which together produce an estimated 85% of the world’s palm oil supply. Today, palm oil is the most important of the 17 major oils and fats traded in the global market, contributing 28% to the world’s production of oils and fats in 2011 (Fig. 6).

World production of palm oil vis-à-vis other veget

Malaysia has a total land mass of 329,000 square kilometers in Peninsular Malaysia and the states of Sabah and Sarawak (collectively known as East Malaysia) on the island of Borneo to the east (Fig. 7).

Map of Malaysia

As Malaysia is geographically small, arable land for new oil palm plantations is scarce. Past growth of palm oil production in Malaysia was achieved by expanding onto land formerly used to cultivate other crops such as rubber, cacao, and coconut or onto degraded land or secondary forests. With a scarcity of suitable land banks, the industry can no longer rely on acreage expansion to raise production. The only way forward is to increase yields significantly. Although CPO yield has been stagnating (Fig. 8),

Crude palm oil yield: 1990 to 2011

the actual projection of yield per hectare and the theoretical yield potential of the oil palm can range from 3 MT/ha to 14 MT/ha (Fig. 9).

Yield potential of the oil palm

The theoretical maximum palm oil yield is 18.2 MT/ha/yr (Corley, 1998). Malaysia continues to increase planters’ productivity and competitiveness through a nationwide replacement of unproductive palms with high-yielding hybrids, and the exercise includes replanting on lands owned by independent smallholders who contribute to 14% of the area under oil palm in Malaysia (Fig. 10).

Distribution of oil palm planted area by category:

There is also a need to close yield gaps between smallholders and plantation companies; the latter have greater financial resources to manage their estates better and attain higher yields. Under the oil palm sector NKEA, independent smallholders will be clustered around their nearest mills into cooperatives to promote, mandate, and implement best management practices so that the national CPO yield can be improved significantly by 2020 to 6 MT/ha/yr.

Besides good agricultural practices and good harvesting and processing methods, the competitiveness of the industry has also depended on planting improved materials that give better yield. The oil palm NKEA addresses this issue comprehensively. Ongoing research and development by the Malaysian Palm Oil Board (MPOB) and the industry have resulted in elite dura × pisifera material from conventional breeding with a yield exceeding 6 MT/ha/yr. Further, use of tissue culture technology has resulted in the development of clones with yields of 8–12 MT/ha/yr. These materials will go a long way toward supporting replanting efforts on old oil palm stands and ensuring increased palm oil production without land expansion.

In addition to investigations on selective breeding, the oil palm genome project undertaken in collaboration with an international consortium currently comprising 13 members has allowed MPOB to have the most comprehensive genetic blueprint of the oil palm to date. In the longer term, genomics-guided breeding will help expedite the production of improved planting material, tissue culture uniformity, high yield, and disease resistance.

The oil palm industry in Malaysia is a well-regulated industry with many laws and regulations governing environmental management, forest conservation, and sustainability. These include water management, soil conservation, biological control of pests, and reduction of waste and greenhouse gas (GHG) emissions. To address the issue of GHG emissions, which is related to global warming, one can use a life cycle approach (LCA) to develop an inventory of GHG emissions along the entire palm oil supply chain beginning with the cultivation and ending with the determination of palm products. Malaysia views mitigation using the LCA as an investment to ensure the sustainable production of palm oil as well as the sustainable competitiveness of palm oil in the global oils and fats market.

Key challenges and opportunities

One of the most challenging issues confronting the oil palm industry is proving its commitment to sustainable production of palm oil and oil palm products. Several nongovernmental organizations have related oil palm cultivation to deforestation and declining biodiversity. In response, several agri-food industries are promoting certified sustainable palm oil (CSPO) to meet the increasing demand of buyers requiring proof of sustainability in the palm oil supply chain. Currently, CSPO—such as certified RSPO (Roundtable on Sustainable Palm Oil) palm oil—has grown to 11% of global CPO production, with Malaysian producers supplying 48% and Indonesia 40% of CSPO. Most producers of CSPO are big plantation companies that have the human resources and financial capacity to meet the sustainability criteria put forth by RSPO sustainable certification schemes and biofuel certification systems such as the International Sustainability and Carbon Certification and Round Table on Sustainable Biofuels.

One of the great opportunities for the palm industry will likely be related to nutrition. Palm oil is desirable as a food for its technical and nutritional attributes. It has good resistance to oxidation, which contributes to its longer shelf life. It is an ideal ingredient in frying oil blends owing to its stability under prolonged elevated temperature. Palm oil can be combined with more solid fractions, such as palm stearin, to make products of a required consistency without hydrogenation. Thus, palm oil has been used as a replacement for traditional hydrogenated seed oils as a strategy to circumvent trans fats. Blending palm oil with other oils to meet dietary recommendations of 1:1:1 ratio of saturated/monounsaturated/polyunsaturated fatty acids will improve the oxidative stability of soft oils such as soybean and canola oil.

Palm oil is phytonutrient rich, containing a number of minor components such as α- and β-carotene, tocotrienols, coenzyme Q10, phytosterols, and squalene. These minor components confer potent antioxidant and free-radical-scavenging activities and anti-cancer properties.

Regulatory outlook

With consumers from developed countries becoming increasingly concerned about the social and environmental aspects of production and marketing of products, sustainability requirements are being incorporated into national laws and regulations. Trade in palm oil-based biodiesel may be influenced by requirements to certify environmentally and socially sustainable production, examples being the European Union Renewable Energy Directive and the US Environmental Protection Agency Renewable Fuel Standard programs. The European Commission has already adopted a number of conditionalities and recognized seven voluntary sustainability standards (Voegele, 2011).

Notwithstanding land restrictions and environmental legislation, global demand for and output of palm oil is expected to increase steadily. Although current legislation for sustainable requirements is limited to palm oil (as well as all other vegetable oils) for production of biofuel, increasing consumer awareness on sustainability may drive the demand for sustainable palm oil regulations with respect to food. As the world’s largest supplier of RSPO-certified sustainable palm oil, Malaysia is well prepared to handle environmental policies of importing countries.

The continuity of palm

The oil palm is the world’s most efficient oil-bearing crop in terms of land utilization and productivity. A hectare of cultivated oil palm land can supply about ten and five times more oil than a soybean or rapeseed hectare, respectively. Whether further improvements occur in the agronomic performance of the palm or the nutritional property of palm oil, the crop’s future depends on innovation through research and development. With a head start of more than 100 years in the oil palm business, Malaysia has a competitive advantage and will continue to innovate with continued support and facilitation of agronomic research, technology transfer, and alliances with other centers of excellence to ensure the sustainable development of the industry.

Currently, 99% of palm oil in nonfood applications is used in basic oleochemical products such as fatty acids, fatty alcohols, methyl esters, and glycerin. The remaining 1% is in oleo derivatives that are developed from basic oleochemicals. One strategy to maximize economic opportunities of palm oil is to shift the share of nonfood applications from basic to higher-value oleo derivatives by producing agrochemicals, surfactants, biolubricants, biopolyols, and glycerol derivatives. Additionally, Malaysia is encouraging expansion of high-value food and health-based products such as functional food products and food supplements that contain palm phytonutrients.

Malaysia is expected to remain the world’s second largest producer and a major exporter of oil palm products during 2012. Initiatives have already been set to ensure that the industry will progress in a responsible and sustainable manner for diversification into various food and nonfood products.

Choo Yuen May is an international award-winning scientist and inventor with 54 patents, author of innumerable articles, and a leader in the field of oil palm as a source of renewable energy. As the director general of the Malaysian Palm Oil Board, she leads and directs programs to advance the sustainable development, socially responsible expansion, and competitiveness of the Malaysian oil palm industry. She can be contacted at


1. Corley, R.H.V., What is the upper limit to oil extraction ratio? In Proceedings of International Conference on Oil and Kernel Production in Oil Palm—A Global Perspective, edited by N. Rajanaidu, I.E. Henson, and B.S. Jalani, Palm Oil Research Institute of Malaysia, Bangi, Malaysia , 1998, pp. 256–269. Malaysian Oil Palm Statistics 2011, Malaysian Palm Oil Board, Ministry of Plantation Industries and Commodities, Malaysia. Deepening Malaysia’s palm oil advantage, in Economic Transformation Programme, A Roadmap for Malaysia, Performance Management and Delivery Unit (PEMANDU), Prime Minister’s Department, Malaysia, 2010, Chapter 9, pp. 281–314. Voegele, E., European Commission announces new voluntary schemes under RED, Biodiesel Magazine, July 20, 2011.

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