As Palm Oil Prices Soar, Farmers Mix Crops with Timber and Coffee

International palm oil prices have soared to the highest level in two and a half years amid concerns about production declines, increased export tariffs, and a flood of speculative money entering the market.

According to the Malaysian palm oil futures, prices briefly hit US $1170 a tonne this week, the highest price since June 2022, when global supply concerns were growing about the oil used in frying oil and margarine.

One factor concerns production cuts in top producer Malaysia, which was hit by prolonged rains and floods in November.  Malaysia’s October production volume was about 1.8 million tonnes, down 7% year-on-year, and according to domestic manufacturers, as decreased production is expected to continue.

An increase in export tariffs in Indonesia, another major producer, is also a factor—according to Reuters, Indonesia raised the benchmark price this month from US $961.97 to $1071.67 a tonne and export tariffs from $124 to $178. The proportion of palm oil-based fuel mixed into diesel in Indonesiais also expected to increase demand from 35% to 40% from January.

“In addition to the tight supply, the continued weakness in futures for the three main grain products – soybeans, wheat and corn – has led to an inflow of speculative money into palm oil, pushing up prices,” said the chief grain analyst at food processing company Nippon.

Meanwhile, new biodiversity research at Wageningen University in the Netherlands suggests that inter-cropping, the practice of growing two or more crops together, could be one key to mitigating the impact of palm oil plantations on forests and biodiversity.

Palm oil farmers and companies commonly believe the crop needs to be cultivated as a monoculture—row upon row of nothing but oil palms—to maximise yields. This is due to the misguided belief that other species growing among the oil palms will compete for light and nutrients.

However, intercropping or livestock integration does not negatively affect palm oil yield, according to Maja Slingerland at Wageningen University, who researches palm oil and cocoa production from agronomic and socio-economic perspectives.

Slingerland co-authored a recent research paper published by Tropenbos International, a Dutch consultancy focused on sustainable forestry. The paper examined smallholder palm oil plantations in Uganda and found no negative effects on the growth of oil palms or intercrops in the plantations’ first four to five years of life.

In Indonesia’s Central Kalimantan province, farmers grow banana and cassava in between oil palm trees on mineral soils, while in Malaysia, farmers in Johor plant pineapple on peat soils.

A more formalised intercropping system was developed by the Malaysian Palm Oil Board in 2009. It is called the double-row avenue system, and it sees the same number of trees planted per hectare (138) as in the conventional planting configuration but closer together in double rows. This leaves wide avenues’ for growing other crops between the double rows.

For farmers, this allows the cultivation of various combinations of high-value crops, such as cacao, coffee, vanilla, fruit or timber harvesting, with minimum negative impacts on oil palm yields. It also allows for a wider choice of crops that can receive adequate light, water and nutrients.

Growing multiple kinds of annual and perennial crops together in a system mimicking a forest like this is called agroforestry, an agricultural technique found worldwide, with well-known examples such as shade-grown coffee. This, in turn, can improve farmers’ livelihoods as they become less dependent on a single crop, in this case, palm oil, and less prone to the commodity’s fluctuating price.

“It increases living income, food supply and rural development,” Dr Maja Slingerland said in an online seminar on palm oil smallholders earlier this year.

Besides that, intercropping also saves land because alternative cash crops like pineapples can be planted between oil palm trees, and forests surrounding the plantations don’t need to be cleared.

Agricultural land expansion often drives deforestation and forest degradation. In Indonesia, the world’s biggest palm oil producer, the vast expansion of oil palm and other monoculture crops has contributed to massive deforestation in recent decades.

“This saving of land should be rewarded because it doesn’t need to be deforested,” Dr Slingerland asserts.

“This is a missing link in all the certification systems,” she said.

“Intercropping also reduces the need for fertilisers and herbicides when livestock, such as cattle, are integrated into the plantations.”

Keeping animals under intercropped systems with multiple perennial and/or annual crops is a form of agroforestry called silvopasture, which often also includes goats, ducks, and chickens.

When integrating cattle, they graze in the plantation within a designated plot based on grass availability. The cattle are rotated daily to other parts of the plantation, eating the weeds that sprout among the oil palm trees.

“They reduce the use of herbicides because the cattle act as a weeding mechanism, and they save fertilisers because cattle leaves urine and feces,” Dr Slingerland said.

Research has shown that growers can save 25-50% of weeding costs and increase the production of fresh palm fruit yield by 16.7% under such a system. Silvopasture has also been found to mitigate forest fires in Spain, with sheep and cattle grazing the brush that often ignites during dry times.

“Livestock reduces the risk of forest fires, eliminating [the] biomass of bushes and lichens from the ground,” said María Rosa Mosquera-Losada, president of the European Agroforestry Federation, who is in charge of the Department of Crop Production at the University of Santiago de Compostela.

Other environmental benefits of intercropping that have been identified are the increase of carbon stock, the improvement of erosion control, and the decrease of nitrogen leaching. With many benefits offered by the intercropping system, Dr Slingerland says there is no reason for the palm oil industry to not be creative in integrating other crops within oil palm plantations.

“All these seas of palm oil trees are not necessary,” she said. “Why not be creative? We should think of overlapping land use, and we do the same in the EU. That will save a lot of land and greenhouse gas emissions and biodiversity.”

Tags: prices, vanilla, Production, Malaysia, palm oil, yield, futures, Market, coffee, export tariffs, cultivation, Indonesia, cacao