More diverse offerings: Multi-purpose usage adds to growth potential in palm oil cultivation

Albeit modest compared to the revenues brought in by coffee producers, palm oil is increasingly establishing its agricultural value. While moderately growing since the start of production in the early 1960s, the sector has experienced faster growth from the early 2000s onwards as a result of regulatory incentives and profitable export prices. Since 2000 planted surface has nearly tripled, reaching 402,000 ha in 2010, of which 150,000 ha have yet to reach the production phase.

According to the National Federation of Oil Palm Growers (Federación Nacional de Cultivadores de Palma de Aceite, FEDEPALMA), production of palm fruits doubled between 2002 and 2012 when it reached 5.14m tonnes, equal to 20% of the value of the entire agricultural sector. Meanwhile, production of palm oil went up from 524,872 tonnes in 2002 to 973,668 tonnes in 2012, positioning Colombia as the fourthlargest producer globally, accounting for 9% of worldwide output. With over 23% of production coming from small-to-medium-sized growers, the sector’s expansion is also building significant socioeconomic value.

There are a total of 115 strategic productive alliances in place between large business owners and small producers, which benefit more than 6000 rural families, according to FEDEPALMA. To secure the income of producers and soften the impact of fluctuations in international prices, a price stabilisation fund has been established. Payments to the fund by producers, distributors and exporters, are determined on a monthly basis according to global market prices.

BIOFUELS: Although the lion’s share of output goes towards domestic use for margarine and butter production, the sector’s recent growth has been spurred by an increase in the local consumption of biodiesel. To promote local industries and employment, lessen the reliance on limited oil reserves and encourage environmental awareness, Law 939, also called the Biodiesel Decree, became effective in 2008 and mandates a minimum amount of palm oil in every litre of diesel sold. The initial 5% requirement has now been raised to 10%.

In line with increasing demand, a growing number of biofuel refineries have been inaugurated over the past few years. At present six plants are operating a total capacity of some 500,000 tonnes, which offers excess capacity to accommodate further percentage hikes.

With more than 80,000 people enjoying direct or indirect employment in the biodiesel and ethanol industries, the government seems in favour of continuing to promote it. As growers gradually expand output to meet the 10% requirement, policymakers are paving the way for an increase to 15% by 2015, the world’s largest such composition. FEDEPALMA is lobbying for 20% by 2020. Producers have voiced their satisfaction with the regulations as adverse developments in global demand and supply have brought down export prices. Moreover, a deficient infrastructure network and the rapid appreciation of the peso continue to undermine the sector’s cost-competitiveness globally. As a result, biofuel refinery supplies have increasingly replaced exports, which fell from around 300,000 tonnes in 2006 to less than 100,000 tonnes in 2010.

DOMINO EFFECT: The prominence of biofuels has also impacted other agricultural segments. Law 693, or the Ethanol Decree, which became effective in 2009, mandates a 10% ethanol application to the gas mix. Over the past few years, the sugar processing industry has experienced rapid growth and currently supplies 80% of the mandated quantities, while the race to fill the remainder has unlocked sizeable investment plans. One example is Bioenergy, a local grower of sugar cane, with plans to invest up to $400m in output expansion.

Similar to biodiesel, policymakers are also planning to raise ethanol proportions in the gas mix to 20% by the end of the decade. The industry’s rapid adoption of biofuels and its success in regional economies such as neighbouring Brazil is stirring the political debate on allocation of new lands and an amendment to surface limits. “As the requirement for investments in capital goods is significant, farmers need a high production volume to ensure profitability,” Alfonso Uribe Uribe, president of Invesa, a local agro-industrial company, told OBG. According to FEDEPALMA, an estimated 3.5m ha is suitable for palm oil cultivation in line with the world’s leading producers in South-east Asia. Meanwhile, the Antillanura Plains, stretching over 4m ha, make ideal farming grounds for sugar cane. However, in line with current legislation, no single landowner can own more than one family agricultural unit, a measure to curb high land concentration. Large-scale investments in biofuels are therefore challenged by fragmented production.

LAND ACCESS: While the debate is ongoing, efforts to circumvent land caps have failed thus far, keeping domestic and foreign investments at bay. Moreover, ongoing security issues in palm-oil-producing areas, in particular along the Pacific coast, have further restricted opportunities for a rapid resolution. In July 2012 local media reported on allegations that 19 palm oil producers in Chocó department had engaged paramilitary groups to illegally appropriate lands from local farmers. Meanwhile, FEDEPALMA has made frequent calls to the government over the past year for security support in the municipality of Tumaco, to protect farmers from armed groups looking to take over their lands.

As the debate on land allocation progresses, the industry is taking measures to increase output on existing land. According to FEDEPALMA, yields on palm oil plantations average 2.9 tonnes per ha annually compared to a global average of 3.7 tonnes. A limited infrastructure network is partly to blame, but the industry’s immediate efforts are aimed at the treatment of bud rot, a crop disease that over the past decades has affected thousands of hectares of palm oil trees across the country. FEDEPALMA estimates the loss of output due to the disease to be between 6% and 11% per year and is particularly concerned by its spread and resistant nature. Incidents have been especially damaging in Tumaco and Puerto Wilches, located in the northern department of Santander.

GRASSROOTS: As a result, the association, in collaboration with the agricultural ministry, has launched a programme entitled Reactiva la Tierra, Reactiva la Largely targeting small to medium growers, the programme seeks to raise awareness, treat or replace infected plantations and facilitate access to more resistant seeds. While the programme has been in place for some years, its impact has yet to be seen as the production cycle of replaced plantations takes up to seven years.

Despite its challenges, palm oil production is set to continue its growth in surface as well as in output. This is largely thanks to the incentives provided by biofuels, but backed by ongoing efforts to further diversify the product’s applications. The product’s traditional usage, such as margarine and butter, is jeopardised by the rapid advancement of alternative inputs. One example is soy, which is mainly imported from the US on increasingly favourable terms as a result of the bilateral free trade agreement (FTA). The industry is therefore eager to increase the product’s diversification.

MULTI-PURPOSE USAGE: Colombia has started contributing to multilateral research on the usage of palm oil for airplane fuel while the private sector has taken the lead on the product’s application to consumer goods. One example is Indupalma, a foreign-owned agricultural investment firm with palm oil plantations in the north of the country. The company is looking into the construction of a facility for the production of palmoil-based detergents for Latin America.

The export market continues to provide a readily accessible alternative. “Volume growth that cannot be absorbed by biodiesel will be exported,” Jens MesaDishington, president of FEDEPALMA, said. The recent string of FTAs between Colombia and key trading partners such as the US, and soon Europe, are geared at facilitating access to large-scale demand that, albeit depressed at the moment, will provide a beneficial alternative to domestic consumption. FEDEPALMA expects planted surface to increase to 743,000 ha by 2020, allowing for an annual production of up to 3.5m tonnes. The association is striving for an increase in output to 5.5 tonnes per hectare by the end of the decade.