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FT’s Kevin Brown echoes some of the points we made regarding crude palm oil and specifically the fundamentals underlying the case for a secular bull market ahead. That said, he writes, while margins are fat at the moment for producers like Siam Darby and Golden Agri-Resources–the world’s first and second biggest listed producers respectively–given spot prices, production costs may be set to soar in the coming years as an increasing lack of plantable land in both Malaysia and Indonesia is leading to another bout of African land and resource grab–“not suprising since the Asian industry got its start by importing plants from Africa back in the 1960s”–in which development costs will increase. Nevertheless expect Siam’s talks with Cameroon (a country that has explicitly made palm oil production and research an investment priority) to ultimately succeed, while Golden Agri, fresh off its Liberian-deal last fall, will likely continue expansion as [African] governments are “eager for export revenues and jobs for unemployed workers.” But how this all factors into equity risk premiums is another matter. Meanwhile, a piece today touches on the same, broad theme, as US buy-out giant Carlyle is set to launch a $750m Africa fund, though in fairness the group’s co-founder and managing director (and former Jimmy Carter-adviser) David Rubenstein has been an African-bull for some time now. “The majority of Americans don’t pay enough attention to Africa,” one source close to Carlyle said. “It has been China that has been the catalyst for economic activity in Africa.” Rubenstein, by the way, is still long-term positive on his firm’s MENA investments, including presumably last year’s foray into Saudi Arabia.
Robust consumption (global demand has doubled over the past decade) for crude palm oil and its underlying derivative products such as cooking oil, cosmetics, toiletries, and industrial cleaning agents (i.e. all fairly demand sticky goods) led by China and India (5%/annum growth over the past four years, propelled of late by government restocking in the face of inflation-induced reserve releases, in the former and 16% y/y in the past five years for the latter, augmented partially by a lagging domestic peanut oil sector) coupled with La Nina-related, mediocre crop yields in Argentina (the third largest exporter of soybeans and the top exporter of soybean oil) and El-Nino related low yields in Malaysia (which, coupled with Indonesia, supplies roughly 90% of global palm oil production) may help sustain futures prices in the short-term. Analysts point to Singapore-listed Golden Agri-Resources, for one, as a firm that will likely continue to benefit. Barclays projected “global stocks could fall to around 4.5 weeks of consumption–the lowest level in over 30 years” and will rebound only to the degree that governments in Malaysia and Indonesia resist meddling with price controls and export restrictions (to assuage the retail sector they already control prices and subsidize VAT) and weather patterns comply (historically, “yields [should] improve in the second half of 2011 as El Nino’s lagged impact wears off and drier weather allows harvesting and transportation to return to normal operations”). To that end, ECM Libra, an investment bank, notes that an examination of atmospheric indicators such as the Southern Oscillation Index (SOI) and its inverse relationship with the monthly change in Malaysian palm oil production is positive in terms of the probability of near-term yields mean-reverting (“January saw the SOI index trending down to 19.9 from a high of 27.1; to note, the 27.1 reading was the highest La Nina reading since 1973). That said, as with many food commodities a bona fide secular bull market (as in price inflation) in palm oil may be in the making due to notable structural restraints (in addition to the aforementioned Asian demand dynamic): Malaysia’s future yield prospects relative to current ones look dim, while environmental concerns–namely a two-year moratorium on deforestation based in part on Indonesia’s bilateral treaty with Norway–may interminably hamper Indonesian output (though per Greenpeace said edict in reality has far more bark than bite).
Financial Times notes that China’s growing appetitite for soybeans (it is the world’s largest buyer), which are crushed into vegetable oil and also into livestock meal, coupled with droughts in both Brazil and Argentina (the world’s second and third largest exporters) and dwindling inventories in the U.S. (the world’s largest) are causing a price spike in the old crop. The new crop, however, which will be harvested in November, is expected to be a bumper harvest, meaning that while the crop’s current steamroll may still have a bit more pace to it, prices should ultimately wane. Likewise, the rise in the price of palm oil, another source of vegetable oil, which is increasing in the short-term (up 60% YTD) thanks to decreasing inventories in Malaysia, its largest exporter, should converge back to the mean as supplies have a chance to react.
The price of palm oil, down 67 percent from its March record, is nearing the end of its decline, according to Goldman Sachs. However, despite decreasing supplies and the fact that, per one analyst, “edible oil demand has remained relatively resilient even during severe recessions,” Goldman cut its price forecast for palm oil for the next two years by between 41 percent and 50 percent, joining analysts at CLSA Asia Pacific-Markets and UBS AG.
Malaysia (home to growers such as IOI Corp., Sime Darby Bhd. and Kuala Lumpur Kepong Bhd.) and Indonesia are the world’s largest producers of palm oil, which is also their biggest agricultural export. The two are felling oil palms and planting younger saplings in order to cut output. Goldman noted that historically, the price of the edible oil has been mainly driven by supply. Replanting will thus help reduce output, while the yield from plantations is under “stress”.
Back on March 4th, palm oil reached a record 4,486 ringgit ($1,236) a metric ton in Malaysia. But CLSA analysts predict that it will probably only bring 1,000 ringgit a ton in 2009, and 1,250 ringgit in 2010.
JGW
Frontier Markets 