Investment Strategy: Palm Oil & the Africa Connection

There has been a lot of talk about Palm oil, fueled mostly by the meteoric rise of palm oil futures on the back of demand from — where else — China and India.  Red Palm oil is cold-pressed and bottled as cooking oil;  blended into mayonnaise & salad oil;  even fortified into health foods & anti-aging cosmetics.  The main global trade of the product is through RBDPO (Refined Bleached Deodorized Palm Oil), which is then used as the raw material for the above products.  Now, as if that demand were not enough, the Palm oil industry has jumped onto the bio-fuels bandwagon.  I have serious issues in terms of energy efficiency (I’m an Engineer after all) of these bio-fuels but you can’t argue with the effect that is having on demand.

Palm Oil Plantaion

Palm oil industry advocates would like you to think of pictures like this when you think of the industry.  But who are we kidding?  The exigencies of large mono-culture plantations mean these will really be huge facilities stretching for kilometers.  With attendant ravaging of the environment and biodiversity.  This is especially true considering the politico-commercial realities of the two biggest producers Indonesia and Malaysia as forests are cleared by fire to make way for plantations.

But the price keeps rising, especially now as it moves in concert with rising crude oil prices.

The May-delivery contract rose 2.1 percent to 3,546 ringgit ($1,169) a metric ton on the Malaysia Derivatives Exchange, the biggest gain since Feb. 2. Futures fell 8.9 percent in February, the first monthly decline since June.

Palm oil futures gained 35 percent in the past year as adverse weather hurt oilseed crops in the main growing regions, tightening vegetable oil supplies. Crude oil climbed as much as 0.6 percent as authorities in Iran, the second-largest producer in the Organization of Petroleum Exporting Countries, arrested opposition leaders to derail protests scheduled today.

Couple the demand side with the supply-side squeeze coming from plantation owners in Malaysia and Indonesia running out of land to plant in.  This is especially true in Indonesia as the government has slapped a 2-year moratorium on plantation development.  Large producers like Sime Darby — the world’s biggest listed producer — Wilmar International and Olam have taken the logical step and started looking for plantation prospects in Africa.  This is a homecoming of sorts for the product as it originated in that continent (moving, like rubber, to Malaysia & Indonesia, because of the British Empire) and there has been interest aplenty in Ghana, Ivory Coast and Cameroon, with Sime Darby inking a USD 1.6 billion deal in Liberia last year.  Now,

Sime Darby, the world’s biggest listed palm oil producer, is considering plans for a 300,000 hectare plantation in Cameroon as the industry rushes to expand in Africa in response to rising demand and near-record prices.

Mohd Bakke Salleh, Sime’s chief executive, said the M$7.5bn ($2.5bn) project was the Malaysian group’s best prospect for expanding its 640,000ha land bank after a 220,000ha concession was granted in Liberia last year.

I wonder why they don’t look at Benin.  On my last trip to Africa I was struck by the potential agri-business opportunity there:  it is rather large, pretty sparsely populated, has two rainy seasons and has seriously under-developed agriculture.  Even to my non-soil scientist eyes, the land looked incredibly fertile.  But it was very weird to see almost no cultivation of the land at all.  It really wouldn’t be much of a stretch to set up large agri-business there.  The country is reasonably stable (more so considering what you see in neighboring Nigeria) and the corruption is a lot less.  Well, a lot less if you just came in via Nigeria.

I was more interested in the country’s potential for milk production — for obvious reasons — for export to India but some local development types mentioned that even that could come after Benin had supplied grain, vegetables, dairy, poultry and meat to Nigeria next door.  Turns out Nigeria — self-sufficient before independence — is now completely dependent on imports (then again, the country imports refined petroleum products too!).  I’d looked at an Italian dairy farm outside Cotonou, the company essentially cleared the rolling land of scrub and presto had a rather fertile dairy farm.

If we could take care of land and taxation issues and the infrastructure, we could have a runner here.  There is a rather sparse network of roads (French built, which completely freaks you out as you drive down what are essentially French departmental roads — complete with French road signs — in West Africa) so there is room for improvement.  On the other hand, the country has a decent enough port and has a very large market for its goods right next door.  Rough calculations suggest an initial outlay of USD 10 billion with the hard hoeing coming from convincing the development community.  The latter is not easy but it does give some food for thought.  The outlay would be large, the country and execution risk high, but it is real assets and farming.

Related Articles

• Palm Oil Output in Malaysia May Rise on Good Weather, Group Says (businessweek.com)
• Palm Oil Output in Malaysia to Gain in 2011, Yusof Predicts (businessweek.com)
• Malaysia deforestation: Why is palm oil so controversial? (telegraph.co.uk)
• Second-largest Palm Oil Company Commits to Preserving Valuable Forest (e360.yale.edu)