Since most of my investment is on oil palm plantation companies, it is essential that I must to find out the future prospect of this industry on the whole.
At the recent round table conference as reported by The Star on 25th Aug 2012, an additional 6 million tons of editable oil is required annually to feed the additional world population. It is also due to the general economic growth of the people, especially in India and China. There are less people on starvation.
Where can you find additional land annually to produce 6 million ton of editable oil?
Although China is the largest soyabean producer, they still need to import more to meet their requirement. America being the 2nd largest soybean producer has an average annual growth rate of only 5% soybean production over the past 4 decades compared to Brazil’s more robust 14% average annual increase. Experts expect Brazil to overtake America as the world’s largest soybean producer within a few years.
Soybean Oil Production by Country in 1000 MT
Rank Country Production (1000 MT)
1 China 12,246
2 United States 8,920
3 Brazil 7,100
4 Argentina 6,975
5 EU-27 2,242
6 India 1,688
It is a fact that one hectare of land can produce half ton of soya oil while one hectare can produce 4 ton of palm oil. Assuming that soya oil can increase 3 million ton and palm oil can increase the other 3 million ton. They will need 6 million hectare of land to produce 3 million ton of soya oil and 750,000 ha to produce 3 million ton of palm oil. Looking at these figures, it is most unlikely they can find so much of additional land for soya every year. As a result, they will have to rely more on palm oil to cater for the annual additional 6 million ton of oil.
Fortunately or unfortunately both China and India our biggest buyers of palm oil cannot grow oil palms. Indonesia and Malaysia produce more than 95% of the total palm oil.
Indonesia Palm Oil production
2010 23600 (1000 MT) 7.27 % increase
2011 26200 (1000 MT) 11.02 % increase
2012 28500 (1000 MT) 8.78 % ‘’ ‘’
2013 31000 (1000 MT) 8.77 % “’””
Malaysian Palm Oil Production
2010 18211 (1000 MT) 2.52 % increase
2011 18202 (1000 MT) -0.05 % “”
2012 19321 (1000 MT) 6.15 % “”””
2013 19200 (1000 MT) -0.63 % Increase
Source: United States Department of Agriculture
Recently the Indonesian Government mandated the use of 10% biodiesel. As a result, Indonesia, the world ’s biggest supplier, will not increase their export this year for the first time since 2010 even as production climbs to a record. Exports may total 21 million metric tons, similar to 2013, while consumption climbs to 10 million tons
According to the latest statistics, Malaysia produced about 19.2 million ton and Indonesia produced 31 million ton in 2013. Most of the larger Malaysian plantation companies own plantation land in Indonesia.
The average production cost per ton of crude palm oil is about Rm 1,300 and the average selling price is about Rm 2,600 in the last few years. The price went above Rm 4,000 per ton not so long ago. What kind of business will give you the much margin of profit?
Moreover, plantation land always appreciates in value and palms will start to fruit after 3 years of planting and will continue to bear fruits for another 20 or more years.
Unlike other manufacturing industries, you cannot simply increase production by working overtime or use more automation to meet demand.
Even when the CPO price is at its lowest level, well managed plantation company can still make profit. Have you seen any plantation company losing money?
I am sure readers want to know which are the best plantation shares to buy. I shall make some research and prepare a list for you.
Investment in undervalued plantation companies is a good long term strategy. The future of the Palm Oil industry is bright