The minimum wage law, which took effect on January 1, is meant to incentivise corporate Malaysia to be less reliant on cheap labour. However, the Malayan Agricultural Producers Association tells Ooi Tee Ching that planters could suffer profit erosion while consumers would face higher food bills if palm oil prices were to fall below RM2,000 a tonne
OIL palm planters, including smallholders, will bleed red ink if palm oil prices were to dip below RM2,000 per tonne, said Malayan Agricultural Producers Association (Mapa).
Following the introduction of the monthly RM900 minimum wage in Peninsular Malaysia, palm oil production costs have gone up to between RM1,200 and RM1,900 per tonne.
In an interview with Business Times, Mapa executive director Mohamad Audong explained that the higher cost of production is mainly due to costlier fertiliser, more expensive foreign worker recruitment fees, higher transportation cost and various taxes imposed by the federal and state governments.
"When the government set the monthly minimum wage at RM900, palm oil prices were trading at around RM3,000 per tonne," he said.
As the minimum wage law is currently enforced by the Human Resources Ministry, palm oil prices are averaging RM2,300 per tonne. "If prices were to drop below RM2,000 per tonne, oil palm planters, including smallholders, will be in big trouble."
Planters who do not comply with the minimum wage risk a maximum fine of RM10,000 per worker. For continuous offenders, they will be fined RM1,000 per day and repeat offenders would face a RM20,000 fine or five years' jail or both.
Mohamad went on to highlight that as the government sought to propel Malaysia into a high income nation by introducing monthly minimum wages of RM900 in Peninsular Malaysia and RM800 in Sabah and Sarawak, it may have overlooked the possibility that planters could suffer severe profit erosion while consumers face higher food bills.
He explained that oil palm planters are price takers. A planter's earnings have always been at the mercy of pricing in the world's commodities markets. If palm oil prices were to plunge further, planters will definitely lose money.
"Don't forget, many of our planters borrow money from banks and issue bonds, of which bankers and insurance companies are subscribers."
Depending on the year of planting, Mapa calculated that palm oil production cost of these heavily-geared planters ranges between RM1,248 and RM2,975 per tonne.
"If palm oil prices were to fall further, some planters may face difficulties in repaying the banks. They'll then hire less hands and there'll be less harvest.
"With less cooking oil available, consumers will have to contend with inflationary food bills."
Every year, the government pays more than RM1 billion in subsidy to keep cooking oil price at an affordable level of RM2.50 per kg.
"As you can see, the minimum wage policy works best if commodity prices are on the uptrend, not when prices are falling," he said.
Mapa represents 184 plantation companies in Peninsular Malaysia, with estates spanning across 700,000ha. These oil palm planters employ some 125,000 workers at the fields, of which 80 per cent are foreigners.
Last year, profits of plantation companies listed on the stock exchange declined by an average of 40 per cent as palm oil prices fell from a high of RM3,600 per tonne to a low of RM2,200 per tonne.
The loss of profits was also compounded by the RM200 monthly wage increment to workers of plantation companies since September 2011.
Mohamad noted the cost of getting food ingredients from farm to table have gone up but planters are not able to testify the same for productivity.
With the minimum wage law taking effect this year, daily wage has gone up from RM27 to RM34.62. Following this, Mapa estimates that plantation companies' profits are likely to shrink by another 10 per cent or so, provided that palm oil prices do not plunge further from the current RM2,300 per tonne.
UOBKayHian, in its latest recommendation to investors, downgraded the plantation sector to "underweight" from "overweight", citing that the new minimum wage will raise pressure on production costs and compress planters' operating margin.
Meanwhile, MCA president Datuk Seri Dr Chua Soi Lek, having proposed that transportation and housing costs for foreign workers be included in their wages at the National Economic Council earlier this week, will instruct four MCA ministers to also raise this issue in the cabinet.
He said these costs, including the annual RM1,250 levy, should be regarded as part of the minimum salary so as to ease employers' burden.
In a recent statement, Malaysian Employers Federation executive director Shamsuddin Bardan concurred that the RM1,250 annual levy on foreign workers should be shifted back to the employees in view of the minimum wage policy.
As it is now, oil palm planters are already providing free housing, water, electricity and healthcare for its workers in the estates.
In response, Mohamad said planters welcome the proposal but noted it would take a long while for it to take effect, even if all parties agree to it.
"Even if the National Economic Council were to agree to the proposal, it would still need the agreement from the National Wages Consultative Council. Following that, it will also take a few more months for the government to re-gazette the new way of calculating minimum wages."
When contacted, a National Union of Plantation Workers spokesperson said the minimum wage policy is being enforced by the government and "it is most appropriate that the Human Resources Ministry comment on this matter".
Human Resources Minister Datuk Seri Dr S. Subramaniam could not be reached for comment as he is overseas.