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David Kempton: neglected palm oil companies get my cash

Our columnist and travelling investor David Kempton explains why he has invested in a trio of palm oil companies.

 
David Kempton: neglected palm oil companies get my cash

Over the past three decades annual production of palm oil has grown from 2 million to 50 million tonnes as it has become an essential ingredient in the production of margarine, chocolate, ice cream and soap.

There are fast growing cooking oil markets in China and India and the US, where there is an accelerating trend away from animal fats. Additionally, 16% of production is now used for biofuels, where the cost of palm oil and Brent crude oil seem correlated: there is a rule of thumb that when the price of palm oil per tonne is no more than eight times that of oil per barrel it works well as a biofuel – which is the current case.

Palm oil can only be grown commercially in a narrow equatorial belt around the world, now an essential product for the economies of those countries in Asia and Africa.

Traditionally, commercial production has been in Malaysia and Indonesia, where the UK quoted companies are mostly located. This has changed recently as increased demand put pressure on deforestation and lost habitats of orang-utans and other wildlife. Hence operations have now developed successfully in Papua, equatorial Africa and America.

Sweet spot

There are seven quoted UK companies and from an investment perspective the palm oil sector seems to have hit a sweet spot. The price hovers round $1,000 per tonne, whilst world stocks are low with very powerful growth projections.

The violent climatic events that seem to occur weekly round the world impact only marginally in the equatorial belt, where climate remains reasonably stable.

And unlike many other commercial crops, the fruit is largely unaffected by disease.  Hence corporate earnings are very predictable compared to almost any other sector with a regular cycle of planting, harvesting, milling and shipping to meet the world’s growing demand.

My UK picks

With this background, the UK quoted companies look a compelling investment case, whilst all vary with geography, approach and longevity. I am invested in three of them, which I describe here, not listed in terms of attraction (a personal judgement) but the size of my investment and, hence, their importance to me.

I visited Equatorial Palm Oil (PAL:AIM) in Liberia last month and spent some time at their massive plantations. An investor would need to feel comfortable with the country; a normal start for any remote investment - and not just in Africa. The two revolutions in Liberia were horrible and the Charles Taylor effect has scared people off even after he left the country in 2003 (and now awaits trial in The Hague.) The country has settled down well in the last nine years with its predominantly Pentecostal Christian religion, well governed by the respected lady president, Ellen Johnson Sirleaf, who was recently re-elected for another six year term.

The company purchased neglected estates from the government and is achieving rapid transformation whilst recruiting labour forces with experience from the previous established plantations.

The Australian management employed a director of plantations with 40 years experience of the sector in Asia, who has brought with him an impressive team to manage all aspects of the development. Climatically, output will always be less than in Asia, but with cheaper production costs.

The company listed two years ago on the UK’s alternative stock market (AIM), raising sufficient funds to obtain a concession to develop an enormous 170,000 hectares in one of the best cultivation locations in Africa, and target planting 50,000 hectares by 2020. This scale would seem madly ambitious except for their fortune in having Siva Group, a wealthy Indian technology group, as a partner in the project, owning 29% of Equatorial.

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28 comments so far. Why not have your say?

Barney Barnato via mobile

Mar 08, 2012 at 07:31

Ever tried palm oil wine David? Ugh! Don't.

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David booth

Mar 08, 2012 at 07:54

Yes but palm oil chop (generally chicken) was great to eat on ships trading to & from West Africa years ago, it just needed a few cold beers to help it down. Regards David B.

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seahound

Mar 08, 2012 at 08:34

David booth that brings back memories,I was a cadet with Ocean Fleets in the 70's trading down there.I can endorse your sentiments !

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Mr. A

Mar 08, 2012 at 08:50

Happy investing in the destruction of the environment in SE Asia & elsewhere. Just because it exists does not mean we have to do it, especially if we are aware of what the result will be.

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Ruth Colvin

Mar 08, 2012 at 09:40

Palm oil is an immoral product and I will not be taking your advice.

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edward bennett

Mar 08, 2012 at 09:49

I try to steer clear of anything encouraging the increased production of palm oil. The damage to the environment is truly horrendous, with the evidence to support this readily available.

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Raymond Hurley

Mar 08, 2012 at 09:55

Palm oil plantations result in the destruction of the rain forrest, and consequent loss of habitat.Investing in palm oil production is morally unacceptable.

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Val Scholes

Mar 08, 2012 at 09:56

I agree with Mr. A, just because one can make money out of it does not mean it is ethically right.

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Matthew Charles Flinders

Mar 08, 2012 at 10:18

Val, but why should ethics take the higher ground compared to making money? An investors main objective is profit.

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Raymond Hurley

Mar 08, 2012 at 10:38

An investor should seek to make a profit,but this should not be at the expense of ethical behaviour.

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Mr. A

Mar 08, 2012 at 10:56

Matthew, that attitude brought us the current economic crisis, did it not?

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Adomski in London

Mar 08, 2012 at 11:13

Mr A, Ruth Calvin and Edward Bennett,

I assume that you don’t use shampoo, commercial soaps, drive a petrol car (avoid use of biodiesel) eat ice cream and avoid all the other multitude palm oil products that are endemic within our society? And if you are worried about the environment, I fully expect you are all vegetarians (who don’t eat soy products), so that you are not contributing to the destruction of the Amazon and the Cerrado through soy and meat production? If not then you are very much hypocrites....stop preaching and start acting.

Regardless of your views on palm oil there are some very ethical sustainable production....investing in those is good for the environment and has very positive social aspects. We need vegetable oil and no other crop produces the same quantity of veg oil in the same area or with same inputs. Would I invest in palm oil in Borneo, certainly not but there are good producers out there. Saying oil palm investment is bad is very narrow minded, and would i ask the question what would you use instead of palm oil?

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Val Scholes

Mar 08, 2012 at 11:53

Matthew, I invest to try and make a little cash, I have enough to live on like most westerners, I don't need to support industries that I beleive are not playing fair.

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Mr. A

Mar 08, 2012 at 12:23

Adomski, I'm not running a company that's destroying the environment, so yes indeed, my track record's pretty good based on that alone. Come on, the idea that only some Jesus-like saint can dare to speak up in these cases is just perverse.

Yes, there are probably sustainable operations but as a n investor living far away, how can you really be sure you were not just sold a nice story?

I'm guessing that palm oil is used because it's the cheapest form of vegetable oil available. Does it have to be palm oil? What are the alternatives? Is there a plant that yields comparable oil that needs a lot less rainfall and can be grown on land that is too poor to use for agriculture? Things might cost more in the end, oh dear! Well, wouldn't that be money well spent.

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Matthew Charles Flinders

Mar 08, 2012 at 12:40

We better stop using oil then. It is damaging our oceans, atmosphere and is argueably one of the main reasons for alot of modern wars. It has certainly done more damage to our environment then palm oil.

My point is, where do you draw the line on acting ethically? You simply can't because it is down to personal opinion. If it is down to personal opinion, then why shoot fellow investors down because of the way they invest. The definition of investing has nothing about acting ethically. Therefore it is rather unfair to come on here and flag up ethical issues when it has nothing to do with investing.

That is your personal opinion, which i fully respect, but do not value.

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Mr. A

Mar 08, 2012 at 12:52

Matthew, it's not unfair at all. Due to the big mess we are in now, which is precisely due to unethical & plain stupid investing, this will become the new norm.

Where do we draw the line? Let's start with the biggies, I suggest. Arms manufacturers, tobacco companies and those making their livelihood mostly from the destruction of the environment. We don't need to be perfect, just cover the (dirty basics) first.

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Matthew Charles Flinders

Mar 08, 2012 at 13:21

Mr A. If that world was or could be real, i would live there.

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Adomski in London

Mar 08, 2012 at 13:42

Mr A,

I have no problem people speaking up, but I think it is better to make comment when you have a full picture and when you have an idea of the consequences of what you are arguing against. Saying something is bad, because you don’t like one aspect of the thing is fine, but think about what the alternative are – its like saying you don’t like coal fired power stations, but you also don’t like nuclear and you don’t want a wind turbine in sight of your house....oh and you are absolutely against biofuels, because that impacts food prices around the world – whats the answer....stop using electricity, same with veg oil and meat – if you are worried about the rainforest destruction don’t have a blanket go at everyone farming in the tropics, instead stop eating meat, using veg oil products, driving your kids to school, flying around the world, etc, – if you don’t you are hypocrite.

Cheaper veg oils can be produced, but it depends how you value the various elements (land, labour, rainfall etc), if everything was included I would suggest that palm ranks very well on the cost front. Let me deal with your questions, Palm oil yields up to 5te/oil/ha under good conditions, the next best commercial oil is less than 1te/oil/ha on good agricultural lands. If 50mte palm is to be replaced – that would require another 50m ha of good agricultural area to be put under crops (that's twice the area of the UK). So yes something other than palm oil could be used, but would result in significantly more destruction of productive lands (agricultural land, rainforest etc)....Unfortunately agriculture is the same as the rest of life, what you get is directly linked to what you put in – the worse the conditions, the poorer the yields. If poor quality lands are used, the area would be much greater and with very large inputs (i.e. fertilizer+irrigation – water use through the roof and carbon footprint down the pan). The more productive regions are the tropics and equatorial regions (more sunshine, more rainfall and often better soils) – palm is very well suited to this environment, which is why it should be promoted in the tropics not denigrated - this alleviates the pressure on other agricultural land and allows other land to produce other crops like vegetables. Of course the ideal would be to cut consumption – but that's a silly idea, it will never happen – unless individuals start making some effort. Where do you stand on reducing your impact on rainforests and delicate ecosystems....think about it next time you go shopping and really look at what you are buying or filling up the tank, or buying that next flight.....

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Franco

Mar 08, 2012 at 14:10

There is no such thing as ethically produced PO. A company buys some jungle and cuts all the trees for timber. It then sells it to some one to grow bananas for a few years, who then sells it to a company who plants oil palms and claims.quite truthfully that he only replaced bananas.

The jungles of Indonesia are being cut at an alarming rate and the underlying reason is palm oil. Decide what kind of world you want to leave behind you and live accordingly.

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Adomski in London

Mar 08, 2012 at 14:51

Great thoughts Franco, what would you use instead of Palm oil?

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seahound

Mar 08, 2012 at 15:39

Well put Adomski

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david kempton

Mar 09, 2012 at 07:54

I am not insensitive to views expressed here, especially if based on proper knowledge of the facts (easily available on line, see World Bank Framework Palm Oil March 2011 etc..) and most plantations, and many resource and oil production sites, do involve clearances in the jungle. These are now always done with proper permits and well monitored, unlike much of the local logging and farming which more damaging; a much bigger problem, not subject to any proper controls.

In Liberia existing palm trees are cut down to plant more palm trees but of much more intense vigorous growth. In all of the large projects I've seen locals are trained, paid properly and given a job, often for life with family job succession prospects. Local schools are established and health units mostly focused on maternity and the usual endemic diseases.

We all know world population grows another 1bn in10 years with increasing demands for better foods. World veg oil production in 2009/10 was 140 MT of which oil palm 33% and soya 27%, yet palm trees yield 20 MT per ha against 5 MT for soya, hence need quarter the area to grow. Palm oil usage grows in US replacing animal fats. We consume it most days in margarine, butter, chocolate, ice cream most processed foods, soaps, and probably in all restaurants. Is there a better way to feed the growing demands of a more prosperous world? Incidentally I write this as a non meat eater, mostly, and spend much of my working week on geothermal projects, so am certainly not oblivious to the antis, but cannot see a better way, provided it is properly permitted and monitored. We cannot stop population growth and demands for better foods in Asia and Africa.

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Adomski in London

Mar 09, 2012 at 08:21

David,

Your facts are incorrect - oil palm yields a maximum of 5te/CPO/ha - in Malaysia, in very good conditions at maturity. West Africa is currently significantly less. Soy yields perhaps 5te grain, but this translates at less than 1te/oil/ha, perhaps you have mixed up grain/ffb with oil? This still makes Palm by far the best source of vegetable oil now and the foreseeable future (algae will, imho not be an option in my lifetime).

You suggestion that palm is better than soy on the basis of oil yield is a ridiculous notion – soy oil is a secondary product, the primary product is the protein – it is the main foodstuff for intensively farmed chicken, pigs and is a major component of intensively farmed fish and cattle diets. They also grow in very different locations – they cannot be compared. In my opinion soy has far bigger environmental impacts than palm, but that is another story.

I take issue with the way you suggest in your comment that local farming is uncontrolled and should be demonised versus palm which is controlled, let’s not kid ourselves as Franco correctly points out above, in new palm plantations (historically they just chopped and burnt for palm), logging and local farming is a precursor to palm oil development - take continuous palm oil out of the cycle and the land would revert to secondary and then primary forest once the land has been farmed to exhaustion. A palm oil plantation ensures that the land will never go back to forest. Don’t get me wrong I think palm is the right way to go, but there should be no new plantations anywhere, ever - effort should be made to rehabilitate what is already there and to improve yields not new hectares, this is what you suggest Equatorial Palm Oil is doing in Liberia - they are not someone I would invest in, but based on what you say above, this is a better model than clearing new land - the impacts of Indirect land Use Change are there for all to see and need to be put in check.

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david kempton

Mar 09, 2012 at 21:46

Adomski in London, and Franco

I don't think my facts are incorrect, but in the space allocated it is hard for me to dig into detail, and when someone knows a subject well (as you clearly do) I can be tripped up by my enforced brevity. I sought facts from the plantations today and would refer you to www.soyatech.com/palm_oil_facts.htm. Their findings in 2007 showed average oil yield Soybean of 0.38 and Oil Palm of 3.74 t/ha/year.

Refer April 2006 paper, news.monagamybay.com by Rhett Butler which states that 'a single ha of palm oil may yield nearly 6,000 litres of crude oil (whereas) soybeans and corn crops yield only 446 and 172 litres per ha'.

If you don't agree with these documents or figures I've got from the plantations and would like to follow up further, do contact me through Citywire. I would always be pleased to hear from you and discuss it. It is a very interesting subject

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Ganderdonk

Mar 10, 2012 at 01:05

Most of western Europe in now a managed landscape from which all the large predators have been removed and medium-sized predators, if not eliminated, are confined in reserves. Should Europeans be surprised that development in other continents is following a similar path? Are not oil palm plantations equivalent to fields of oilseed rape? There is a whiff of hypocrisy in the debate.

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bob dubh

Mar 11, 2012 at 18:32

Palm oil is not something I would invest in. Having visited Malaysia in 2010 and travelled a large area of the peninsula I was shocked and saddened to see how much forest has been destroyed and replaced with rows of palm oil trees. Most of the environmental problems we are faced with are due to the

proliferation of humanity. Increasing polulation is an easy way to achieve growth but anybody can see that this is not infinitely sustainable. All of us , politicians especially have to face up to the need for a reduction in birth rate. It is ludicrous to read of nations such as Russia and Taiwan actively encouraging their populations to produce more offspring. In the meantime we need to find ways to reduce consumotion.

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Raymond Hurley

Mar 11, 2012 at 20:25

I agree with Bob.

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J Jones

Mar 14, 2012 at 23:49

Cutting down rainforests is inevitable with 7 billion people on the planet & the resulting pressure on resources.

Subsidising parents to have offspring via child benefit is also unethical behaviour on an overpopulated planet, but it still happens.

I'll make palm oil investment decisions based on the finances thank you.

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