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Increasing oil yield is the highway to increased profits…

25 Jun 2024

Summary

Four options are identified for increasing profits in oil palm companies: business diversification, area expan- sion, investment in downstream processing and oil yield intensification (OYI) on existing land. Of these, OYI on existing land has the greatest potential. Area expansion was the driving factor for increasing oil output from 1980-2010, but this phase of investment is over because it is now difficult to acquire suitable new land for expansion. Many companies have invested in downstream processing of their own oil but margins from plantations are now higher than from refining and other downstream businesses.

OYI goes beyond increasing fruit bunch yields to improving harvesting and milling efficiency. In most com- panies there are large gaps between actual and achievable oil yields because of lack of focus on primary production. Analysis of listed companies shows that gross profit per hectare is correlated with oil yield. OYI involves improving efficiency with marginal increases in field costs.

Despite increases in genetic oil yield potential (1% per year), oil yields in Indonesia and Malaysia have stag- nated over the past ten years. Our calculations, using plausible assumptions, suggest that on plantations located on good soils and with favourable climatic conditions in Indonesia oil yields could be increased from 4.8 to >6.2 t/ha, resulting in an increase in net profits of USD 790–890/ha.

Five reasons for low yields are identified: under-estimation of yield potential, complacency, misconceptions about the difficulty of OYI, lack of focused leadership, and poor performance reporting. OYI involves improv- ing bunch yields, bunch oil content and oil extraction rates. Genetic improvement also has a role in determin- ing yield as well as pest and disease resistance.

It is possible to split the overall yield gap into five separate yield gaps caused by different factors, each of which must be addressed in OYI. The response due to improving crop recovery and mill efficiency is rapid, but it takes 40 months to realise the full impact of OYI because of the time lag between floral initiation and bunch harvest. Poor plantation establishment can only be addressed fully at replanting.

The OYI process has six phases: identifying the opportunity, strategic analysis, detailed planning, motivating the company, establishing a BMP pilot project, and scaling up. All company departments must be involved in the process from the outset. A best management practice (BMP) pilot project involves setting up test blocks to identify and quantify the opportunity for OYI, requires a review of fertilizer and pest and disease man- agement, milling practices and ex-ante and ex-post financial analysis. Scaling up is complex, and involves updating Standard Operating Procedures (SOPs) and making BMPs routine throughout the plantation. An agronomic information management system (AIMS) database is required for monitoring and evaluation.

OYI needs to be led by top management. The field and the mill are the key areas where production is im- proved, but support from other departments including procurement, HR, IT, logistics, finance, and technical services is required. There needs to be rigorous performance monitoring and financial incentives for those responsible for OYI. Training is required and managers and supervisors should be tested on their knowledge of company SOPs.

OYI will proceed more smoothly if the Board of Directors (BOD) is involved from the outset, from identifying OYI as an opportunity to motivating managers, monitoring progress, and bringing in external expertise. Cas- es of successful BMP implementation projects in Central America, Africa and Southeast Asia are cited. OYI has a positive impact on sustainability by providing more oil without area expansion (thereby avoiding further deforestation). OYI is an essential part of meeting future growth in global demand for vegetable oil with min- imal area expansion as well as increased company profitability.

Download a copy here: OOTBMP 20240625

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