SIPEF : 11b. Responses to written questions AGM ( EN NL )

Written questions ordinary general meeting SIPEF dated 9 June 2021

1. Recently, Indonesia increased the export tax for the month of June to USD 183/tonne; this is in addition to the export levies of USD 255/tonne. Earlier, the CEO stated that he expected these export taxes to be reduced in due course, because the biodiesel program in Indonesia was sufficiently funded. Now, rather the opposite is happening. Can you give an update of your views on these taxes on palm oil in Indonesia and whether palm oil in Indonesia is still profitable in the long run?

In early December 2020, a new matrix was published, where, in addition to the progressive matrix for the export tax, a progressive export levy was also determined. The recent increase is fully in line with the existing rules on export taxes and export levies. As a reminder, the export tax is used to finance the development of a downstream palm oil sector and the replanting of the palm areas of small, independent farmers, while the export levyis used to cover the operating deficits in the production of biodiesel from palm oil. These deficits occur when the price differential between palm oil and crude oil is too large. In such a case, without a subsidy, biodiesel from palm oil would no longer be competitive with crude oil.

According to our analyses, the biodiesel program in Indonesia is indeed sufficiently funded. Thus, a modification of the existing systems is a political matter, the timing of which is very difficult to predict.

At the end of last week, a number of rumours appeared in the market announcing a decrease in the export levy. This could reduce the total tax on palm oil in the form of a tax and levy by about 100 USD/tonne for palm oil prices between 950 and 1 300 USD/tonne. At lower levels, there is a more modest decline.

In response to the profitability of the palm oil operations in Indonesia, the following:

1. As the shareholders will notice with the publication of the half yearly results, palm oil is still very profitable at the current sales prices of over USD 1 000/tonne and the current tax levels. However, the profit potential in Indonesia is clearly capped by these taxes. At present, the Group's activities in Papua New Guinea are the most profitable. But once the palm oil price drops back below USD 800/tonne CIF Rotterdam, all mature operations in Indonesia will again be more profitable than in Papua New Guinea and many other places in the world. So SIPEF still believes very strongly in the future of palm oil in Indonesia.
   However, it cannot be denied, that the introduction of the increased levies at the end of 2020, after the extremely difficult 2019 and the disappointing 2020, was very sour.

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1. Moreover, in our opinion, there is a link between the high Indonesian tax and levy, on the one hand, and the world market prices for palm oil, on the other. It is almost certain that without this high tax the gross palm oil price would not have been at its current level. It is therefore not clear what the net impact of a reduction in taxes will be on the Group's results. Hargy Oil Palms in Papua New Guinea is taking full advantage of the current high prices. Any government intervention has a devastating effect on the transparency of price setting.

2. The image of palm oil in Europe is very negative. Witness the many packages (marketing driven) with the label "without palm oil". Do you ever see this palm oil "bashing" in Europe disappearing? And how do you see the export of palm oil to Europe evolving in the next few years, taking into account the ban on palm oil for biodiesel in Europe. According to the USDA, the import of palm oil has been fluctuating around 6.8 - 7 million tonnes for the last 5 years.

Indeed, there is currently an unceasing stream of unsubtle criticism of palm oil in the European and US markets. This is something we do not see in the markets of the Far East. We therefore believe that this is largely about hidden protectionism in relation to European products, such as rapeseed and sunflower oil, and the US soybean market.

Despite the efforts of interest groups such as RSPO, BASP, MPOB and GAPKI to bring some nuance to this debate, they are failing to convince the general public to openly embrace palm oil. The availability of certified 'sustainable' palm oil is largely ignored, as is the efficiency of palm oil, which is from 5 to 8 times more efficient in yield per hectare than competing vegetable oils, with a much lower use of fertilisers and chemicals. Palm oil uses 6% of planted land for world vegetable oil production, but provides 36% of world volume.

The positive impact of palm oil on employment and social development in the regions of Asia and Africa is left aside in the assessment. The efforts made by Indonesia and Malaysia, the two largest producers, to avoid deforestation are not sufficiently cited and deforestation rates continue to fall back on those of more than five years ago, which were justified at the time.

We expect the use of palm oil for biodiesel production in Europe to decline in the coming years, as will be the case for other vegetable oils too. However, this decrease will be more than compensated by an increasing demand in the emerging markets, where a growing population and rising standards of living will mainly drive the consumption of palm oil, both for food and biodiesel.

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3. Despite all the efforts of many palm oil companies, including SIPEF, to highlight sustainability (with very detailed sustainability reports - congratulations on the 2020 report, by the way!), all palm oil and all producers are being lumped together. Congratulations also on the very high SPOTT score of 80.5%/100%! Do you have a certain target in mind to increase this score or to achieve a certain percentage?

It is SIPEF's endeavour to keep increasing the scores and ratings, which can also be expected of a sustainable palm oil company. We see that most companies are making sustained efforts to improve their score. Therefore, a higher score does not necessarily mean a better ranking. It is also true that each year SPOTT increases the expectations and that, even to get a similar score, more transparency is needed on the applications and evolution of the sustainability criteria. A good example is the GHG baseline and its annual reduction.

We see the SPOTT ranking as one of the elements of the scoring, but in the near future we will also pay more attention to the international rankings of CDP and of ESG in general. After all, it is important for investors to feel supported by an internationally recognised rating of the listed companies in which they invest.

4. Strong demand for vegetable oils has pushed overall stocks down to their lowest levels since 2010/2011 and is behind the sharp rise in all vegetable oils, including palm oil. How do you see average palm oil prices evolving over the next 5 years, taking into account the expected fundamental trends (consumption in emerging markets, less new plantings, biodiesel in the US/Europe/Asia, price differences with soybean oil and crude oil)?

The demandfor palm oil (and vegetable oil, in general) for the food sector continues to grow unchanged at 3-4% per year. This is not expected to change, given the current population growth and the increasing wealth of the middle classes leading to changing dietary patterns.

Four to five years ago, we announced that we were entering a difficult period for palm oil. We estimated this correctly at the time, although our internal stress tests did not take into account a fall below USD 600/tonne. Indeed, the announced use of palm oil for biofuel in Europe was suddenly scaled back, due to a change in the view of biofuel based on imported commodities. This led to an unexpected production surplus, which incidentally also manifested itself in the stocks of other vegetable oils. In the meantime, biofuel activity has started up in the Far East, so that the gap between supply and demand has been closed, and demand from the biodiesel side seems assured for the medium term. The drop in demand in Europe will probably be more than compensated by an increase in demand in the emerging markets.

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Looking at the supply side, there are several causes that will lead to a rather limited increase in available palm oil:

• In the short term, the historically low stocks and the lack of fertilisation by some of the producers, due to the low palm oil prices in recent years.
• In the medium term, a delay in replanting existing areas, which means that the average age of the existing plantations continues to increase and, consequently, the yields are falling. In Malaysia, the planted areas and the corresponding production have even decreased in recent years.
• In the long term, the ever-increasing pressure on forest conservation and diversity makes further expansion, not only in Indonesia, very difficult.

Putting this supply and demand analysis together, we are looking at a strong market for palm oil pricing. We do not see the price dropping below USD 700/tonne for a long time, and even expect USD 800/tonne to be a stable level for the next 5 years. On the other hand, we do not expect current prices of USD 1 100/tonne and above to be maintained, as they are mainly based on temporary shortages in the wider vegetable oil markets.

When analysing the price level of palm oil, we always have to take into account the general commodity markets and the prices of the other vegetable oils like soybean, rapeseed and sunflower. But, also for these crops we see no structural increase that could affect the above conclusion.

5. Do you have any insight into the evolution of new plantings of palm oil and/or sales of palm oil seeds worldwide? Because this could be an indication that the production is levelling off ...

Global expansion in oil palm plantations has been phenomenal over the past 40 years. Planted hectares more than quadrupled between 1980 and 2018, but expansion has come to a standstill in recent years. The two largest producing countries, Indonesia and Malaysia, which together account for 84% of world production, but only use 63% of planted hectares for this purpose (due to their efficiency), have still grown. However, governments have made significant efforts to not allow new land to be developed, by introducing a moratorium on palm expansion since 2018. As the graph below shows, there has been no growth in the most recent years, and this trend has continued after 2018. The focus is now entirely on yield improvements. However, this is a long-term effort, as replanting is very slow and a palm cycle lasts more than 20 years.

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The cited restriction on expansion and the lack of sufficient replanting, combined with La Niña weather effects, meant that in 2020, for the first time in a long time, global palm oil production decreased by 4.5 million tonnes, and this decrease has not yet fully recovered in 2021.

6. The Barema plantation at Hargy achieves 30 tonnes FFB/ha. Which seeds were planted here and which ones do you use at the moment for new plantings?

Hargy has always done all past plantings with DAMI seeds supplied by the local nursery of NBPOL/SDP. DAMI was developed in Papua New Guinea and, therefore, the selection is fully adapted to the growing conditions in Papua New Guinea with its high rainfall and volcanic soils. For the last 4 years we have been using DAMI Super Family, which are 'semi-clonal' seeds and thus show less variation in seed quality, and also give higher yields per hectare. We will therefore see the average yields/ha in Hargy increase further in the coming years.

Meanwhile in Indonesia, VBS has developed Verdant Select seeds, similar to DAMI Super Family. These seeds are also being used, for the time being, by our Indonesian subsidiaries for 30% of all new plantings, a percentage that we will gradually increase further. We are now also looking forward to the development of higher yielding seeds by Verdant, and expect the F1 hybrid seeds from 2028, which will have a much higher potential.

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