MPOB DAILY FFB REFERENCE PRICE: TOWARDS A MORE TRANSPARENT MARKET

MPOB Daily FFB Reference Price:

TOWARDS A MORE
TRANSPARENT
MARKET
Jamil Nordin*,
D. Chandramohan*,
Yusof Basiron* and
R. Venugopal* ABSTRACT

The objective of this paper is to give a detailed explanation regarding the

dissemination of the MPOB Daily Fresh Fruit Bunches (FFB) Reference
Price. The paper will highlight the price formula used and the computation
of the Reference Price according to the various regions. The Reference Price
is meant as a guide to assist the smallholders in determining their FFB
price in relation to crude palm oil (CPO) and palm kernel (PK) prices. The
single reference price will create a transparent market in FFB trading, which
will help towards ensuring a more harmonious relationship amongst small-
holders, FFB traders and millers.

INTRODUCTION monious relationship prevalent in

the industry. Distrust and accusa-
The continued decline in CPO and tions amongst the smallholders,
PK prices since February 1999 had dealers and millers are getting more
a direct impact on the price of acute and serious.
FFB. The monthly average price of Attention should be focused on
FFB (mill-gate basis) was down by the stability in the smallholders’ sec-
72% from RM 22.43 for 1% oil ex- tor because it plays an important role
traction rate (OER) equivalent in not only in the development of the
January 1999 to RM 6.20 in Janu- palm oil industry, but also in the
ary 2001. In other words, based on socio-economic development of the
the smallholders’ average OER of country. The total number of inde-
17.5% for their FFB, the price of pendent smallholders had increased
FFB had declined from RM 393 significantly from a mere 12 384 in
to RM 109 per tonne during this 1980 to 87 718 in 2000. The oil
period. This was the lowest price palm planted area by this sector had
level attained since October 1990 increased sharply from 46 917 ha
(Figure 1). to 320 818 ha during the same
The decline in FFB prices had not period. The area accounted for 9.5%
* Malaysian Palm Oil Board, of the total Malaysian oil palm
only affected the smallholders’ in-
P.O.Box 10620 , 50720 Kuala Lumpur,
Malaysia. come, but also threatened the har- planted area in 2000 ( Table 1).

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OIL PALM INDUSTRY ECONOMIC JOURNAL (VOLUME 1/2001)

25 with the problem of non-uniform-

2500
ity in the quality of the FFB supplied
CPO PK FFB by smallholders. Furthermore, the
2000 20 dealers are also unable to do grad-
ing on small quantities of FFB de-
livered by individual smallholders.

OER
1500 15 As a result, the dealers have to ac-
cept the monthly average graded

RM/1%
RM/t

OER of the FFB from the mills. This

1000 10 situation has aggrieved smallhold-
ers who sell high quality FFB.
There are also variations in the
500 5 CPO price reference and cost deduc-
tions between millers. The process-
ing charges, for instance, are not
0 0
only based on the mill efficiency, but
J F M A M J J A S O N D J F M A M J J A S O N D
also on the quality mix of the FFB
1999/2000
and the competition among mills to
Figure 1. Prices of palm oil products. procure a sufficient supply.

TABLE 1. ST
STAATUS OF INDEPENDENT OIL PALM MPOB DAILY FFB
SMALLHOLDERS REFERENCE PRICE
Ye a r No. of Smallholders Ar ea (ha)
Area
The dissemination of the Daily FFB
1980 12 384 46 917 Reference Price is yet another mar-
1990 53 985 174 290 ket information service offered by
2000 87 718 320 818 MPOB. Thus far, the daily prices re-
Source: MPOB. leased by MPOB covers CPO, proc-
essed palm oil products, PK and
palm kernel oil. In addition, the
LACK OF TRANSPARENCY they deal with the FFB dealers. monthly industry indicators released
IN FFB TRADING The FFB dealers, on the other include production, stock, export
hand, play an important role in the and OER. In general, the objective
In general, the smallholders’ FFB smallholders’ FFB marketing sys- of disseminating such information
trading mechanism is not satisfac- tem. The dealers provide a service by MPOB is not only to assist the
tory and lacks transparency. The to the smallholders, namely, by col- industry in making accurate market-
monthly FFB price determination lecting, loading, unloading and ing decisions, but also to enable
system poses difficulties for small- transporting FFB from the farm to them to monitor the efficiency of
holders in monitoring the daily the mill. However, the charges for their respective companies perform-
traded prices. All this while, small- the services they provide vary and ance.
holders have been selling FFB with- are not controlled, thus causing fur- The objective of the Daily FFB
out knowing their traded prices ther problems to the smallholders. Reference Price is to provide the FFB
(Fugure 2). The dealers, in turn, are faced price in relation to the daily CPO
Most of the smallholders experi-
ence difficulties in understanding
and applying the FFB pricing SH SH SH SH
mechanism, despite the fact that
MPOB has issued guidelines for * NO GRADING AT FARM GATE
computing FFB prices since 1996. FFB DEALERS AND DEALERS’ PREMISE
This steams from the fact that there * ONE GRADING AT MILL
are many factors that have to be * DAILY DELIVERIES
taken into consideration for the MILLS * NO DAILY PRICES
Note: SH-Smallholders
price computation. This has ulti-
mately weakened the bargaining
power of smallholders whenever Figure 2. FFB Marketing system.

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 MPOB DAILY FFB REFERENCE PRICE: TOWARDS A MORE TRANSPARENT MARKET

and PK prices. The Daily FFB Ref- Graded OER of the FFB. This is be- MPOB is able to compute the daily
erence Price release is primarily cause MPOB does not have the in- regional FFB prices. This is no doubt
meant to act as a guide or a refer- formation on Graded OER. Thus, a time consuming and difficult task.
ence not only to the smallholders, the mill OER is considered the most However, special care and diligence
but also to the dealers and millers. appropriate to represent the Graded will be undertaken to ensure the
The price is neither mandatory nor OER since both are highly corre- accuracy and reliability of the esti-
compulsory to be used by any par- lated. mates.
ties concerned. By having a single With this adjustment, the millers To derive at the daily estimated
reference price, it is hoped that the will strive to improve their OER CPO price, the previous day’s aver-
good relationship between the three performance by further enhancing age traded MPOB price will be used
parties concerned, will be main- the management and efficiency of as a basis. It will then be adjusted
tained. In addition, the daily prices the mill as well as controlling the with both the nett price change of
will also overcome the difficulties quality of the FFB received. The CPO in the Malaysian Derivatives
experienced by smallholders in smallholders will be encouraged to Exchange (MDEX) at 11.00 am and
applying the FFB pricing formula to deliver good quality FFB to the mill, price estimates/quotes received from
derive the FFB price. The price will whilst the dealers take efforts not to selected mills and brokers on the
also enable the smallholders to use contaminate their deliveries. same day. In the case of PK, the same
it as a base to negotiate for a better The Base Kernel Extraction Rate method will be applied except for
price or to lower the charges im- for Peninsula Malaysia and Base FFB the MDEX prices. The prices that
posed by the dealers. The quality Oil Extraction Rate for East Malay- will be applied to the formula are
of the FFB traded will also be fur- sia are also adjusted to 5.5% and current month prices. However, if
ther improved since both smallhold- 20% respectively to reflect the cur- there is no price information avail-
ers and mills will strive for better rent status of performance. able for the previous day or for the
quality FFB to maintain high OER. The formula which emphasizes current month, then the latest avail-
Better quality FFB means better on higher OER and better FFB able daily current month prices or
prices for smallholders. quality, will definitely compensate nearest forward month prices will
the income of the smallholders be used.
MPOB DAILY FFB during the low FFB prices. The
REFERENCE PRICE formula for computing the MPOB Deductions
COMPUTATION Daily FFB Reference Price is shown
in Figure 3. The average cost and charges to
Formula be deducted in the formula was
Daily CPO and PK Price Estimate obtained from a special random sur-
To avoid any confusion and ad- vey undertaken by MPOB. The de-
verse repercussion, the current The daily regional CPO and PK ductions applied in the formula by
MPOB FFB pricing formula will con- prices have to be estimated before regions are shown in Table 2.
tinue to be applied with only slight
adjustments made. This is because
the formula, which was developed
• PRICE FOR 1% BOER
in 1996 with the collaboration of the
[(CPOp -C-M-T)% BOER + (PKp x BKER) – PC] ÷ BOER
industry, is now well-accepted and
understood by most independent • PRICE FOR 1 TONNE
mills, dealers and smallholders. The PRICE FOR 1% BOER x MOER
quality control element built into the
formula has been effective in im- Notes:
proving the quality of FFB delivered CPOp = Crude palm oil price local delivered
PKp = Palm kernel price ex-mill
to the mills. This is because the for-
BOER = Base OER
mula requires the FFB to be graded BKER = Base KER
and the quality deductions to be MOER = Mill OER
undertaken as prescribed in the C = Cess
MPOB FFB Grading Manual. M = Commission
The only adjustment made is in T = Transpor t cost
PC = Processing charges
computing the price per tonne by
using the actual average OER of
mills by regions instead of the Figure 3. MPOB Daily FFB Reference Price Computation.

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OIL PALM INDUSTRY ECONOMIC JOURNAL (VOLUME 1/2001)

TABLE 2. AVERAGE COST/CHARGES DEDUCTIONS (RM/t)

ACTION PLAN
Cost/charges Nor th South Central E.Coast Sabah Sarawak
Commission 2.00 2.00 2 . 0 0 2.00 2.00 2.00 MPOB will organize a nation-wide
CPO transpor t 15.00 15.00 15.00 15.00 20.00 21.50 briefing for smallholders, FFB
Processing charges 2 8 . 5 0 3 0 . 0 0 2 7 . 5 0 30.00 38.50 38.50
dealers and mills to ensure that all
Source: MPOB. parties understand the concept of
the Daily FFB Reference Price.
FFB Grades Price Basis Consultation and fine-tuning of
the price computation method, the
For the purpose of price release, The MPOB Daily FFB Reference deductions involved and determin-
the prices of three FFB Grades will Price is on mill-gate basis. This is ing the daily CPO and PK price es-
be introduced based on the regional to ensure that dealers reveal to small- timates will continue to be under-
actual monthly average mill OER. holders the service charges deducted taken regularly to ensure that the
The Grades are as follows: for handling and transporting the FFB price released daily are reliable,
Grade A = actual average FFB from the farm to the mill. Pro- accurate and in line with the regional
mill OER + 1%. ductive interactions between deal- CPO and PK prices.
Grade B = actual average ers and smallholders will reduce Immediate attention will be given
mill OER. exploitation and enhance the price to all problems that might surface
Grade C = actual average discovery mechanism for FFB at the as a result of the price release to en-
mill OER - 1%. farm-gate. sure that no parties are adversely
affected and to maintain the good
The actual average monthly OER Price Release relationship and harmony that exist
will change monthly by regions amongst the smallholders, FFB deal-
according to the mills’ performance. In order to ensure smallholders ers and millers.
Arrangements will be made to use are able to receive and understand
weekly OER submitted by selected the MPOB Daily FFB Reference CONCLUSION
mills to enhance the reliability and Price, due consideration will be
accuracy of the FFB price derived. given to the media used, timing and The MPOB Daily FFB Price is only a
Based on the historical data and language. The daily FFB prices will reference price for the industry. It
the close correlation between mill be announced through the radio in is our hope that this price will cre-
OER and the quality of FFB proc- Malay, Mandarin and Tamil and on ate a more transparent FFB market-
essed, the grades which are based television at 1.00 pm. In order to ing system. With a single reference
on actual mill OER can be accepted promote information and commu- price, we also hope that the har-
to be reflective of the Graded FFB nication technology (ICT) culture mony amongst smallholders, deal-
OER as follows: among oil palm smallholders, the ers and millers will be further en-
Grade A ž 19%. release will also be made available hanced.
Grade B = 18% - 18.9%. in the MPOB Homepage (http://
Grade C = 17% - 17.9%. www.mpob.gov.my) and obtained ACKNOWLEDGEMENT
via MPOB telephone Infoline (03-
The prices of lower Grades are 7045061/2/3/4) from 12.00 noon The authors wish to thank the
not computed in order to encour- daily. Selected newspapers will also Director-General of MPOB for initi-
age mills to maintain high OER and publish the prices the following day. ating the Daily FFB Reference Price
for the smallholders to deliver good The various price release dissemina- concept and approving this paper
quality FFB. tion modes are shown in Table 3. to be published. Appreciation is
also recorded to Mr N Balu, Mr
TABLE 3. MODE OF RELEASE
Kamaruddin Mohd Idris, Ms Jariah
MEDIA PROGRAM TIME
Jidin and Ms Loo Yuen Mei for their
Radio 1 National News 1.00 pm efforts in the preparation of this pa-
Radio 5 Mandarin 1.00 pm
Radio 6 Ta m i l 1.00 per and co-ordinating the daily
Te l e v i s i o n Bisnes M’sia (TV1) 1.00 pm release. The comments, co-opera-
MPOB Homepage (http://www.mpob.gov.my) 12.00 pm tion and advice on the FFB pricing
Infoline (03-7045061/2/3/4) 12.00 pm
Newspapers The Star, Utusan Malaysia The next day method made by POMA, NASH,
Sin Chew Jit Poh and millers and FFB dealers are also ap-
Tamil Namban preciated.

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