Depends on your soil type. Coastal soils are actually quite fertile, especially along the delta regions. However, they are also the perfect breeding ground for ganoderma, which can rapidly kill the oil palms. But the area you are referring to is actually of marginal fertility, so add that with possible ganoderma problems, and you have a pretty bad combination.

Just a few more things to add to your consideration:
(i) What's the average yield per hectare? At 136 stand per ha, you should be getting about 18tonnes per ha for that age profile on coastal soils.
(ii) Is it a low-lying area? Flood prone?
(iii) How's the sanitation of the field? If it is grassy, and the fronds are not stacked properly, you're gonna have a headache bringing it back to shine.
(iv) Could you tell more about the palms themselves? What materials are they from? Are they IOI, Guthrie, Sime, UP, Golden Hope OR any certified seed producers?
(v) Inspect the field: Check the sex ratio. How many male flowers are being produced vs. female flowers. Now the palms are in male cycle, so you need to wait a few more months before the cycle breaks.
(vi) Was the land planted with coconut before? If it was, chances are the ganoderma inocculum is already there, so no point buying it up.

250 acres (100ha) is a pretty sizeable investment. If ever in doubt, it's better to keep on the safe side, especially since you have noted that the palms do not look good. And RM30,000 per acre leasehold is too pricey.

---

Added on July 30, 2008, 5:47 pmI thought there has been a halt on forest to plantation clearing announced recently? Or does that only apply to East Malaysia?

Hmmm... a rough guide for replanting from old oil palm stands is about RM9,000 per ha. With prices now, you should increase that by another 30% to around RM12,000 per ha. But the total cost till maturity (assuming you do ablation like most major plantations) will cost you another 4-5k per year for a further two years, or a total of around RM22,000 till Year 3 per ha.

---

Added on July 30, 2008, 6:02 pmLet me put it in this way: Agriculture has always been a low profit venture compared to other industries. With the exception of the cyclical booms, not all agricultural produce will give you good yields.

Certainly is the case with palm oil. Now, prices may look good, but in truth is it over-inflated. We in the industry are not making the "tonnes of money" claimed by many in the media. Because do not forget, other costs have also gone up as well: Fuel, fertilizers, labor, taxes (aka windfall tax....*grumble!*), and disease control. Those in East Malaysia are in a panic actually, as they are seeing their crude profits crashing to about 4-5k per ha recently with all the hikes taking place. 40-50million may seem a lot of earnings, but that is because the land and cultivation costs are charge out over a period of years. In fact, it appears that to recover the initial cost of cultivation, it will take up to the 10th or 11th year before the land and plantings costs are fully paid for with oil palm.

And don't forget to project in futures costs. Would you be able to survive in this venture if CPO prices fall to around RM2200? It really depends on the management of the plantation. A good management team can keep cost down to about RM900-1000 per ha per year. A not so good one would probably incur a RM1500 operation cost yearly.

Take it from the ironman of the palm oil industry:
In good times, anyone can make money from oil palms; it is the bad times that the goats get separated from the sheeps.

Just like in '97-'98.

This post has been edited by Michael J.: Jul 30 2008, 06:02 PM

Jordy,
I think it doesn't work that way; buying at RM5500 and selling at a higher price i.e RM8000. There are two problems to this:

Firstly, the buyer would not buy from you at RM8000 if CHGS pays the yearly % payout based on the grower's fee of RM5500.

On the other hand, CHGS would not let you earn 30% profit if they have to pay the yearly payout % based on RM8000 to the buyer that had bought from you at that price.

Of course the ideal but highly unilkely case for growers is that the buyer buys at RM8000 from you. You make a quick RM2500. And CHGS pays the yearly % payout base on RM 8000 grower's fee.

This post has been edited by creativ: Jul 30 2008, 06:49 PM

Hi, Mr Michael J
Thank you for the reply, and it really help for me to decide on my investment. The 250 acres plot of Plantation in Cukai is not an attractive bargain, topping that "not so good looking trees". I can't be wasting time on that now.

My costing figures do tally with your cost of replanting, maintenance, management etc., and as such can I not find my mathematics on an acre of palm average yielding 1 ton of fruit/month @ 550rm (today) to retain a good profit of some 300rm nett per acre per acre to the grower of 100 acres of Palm, considering that:
1) the mill is only 30 km away, that as for transportation of fruits to cost
2) using fertilizers not from Felda (as it cost much more)
3) from maintenance to harvesting of fruits are all subcontracted pro-rated at a cost as determined on the yielding factor.
4) Bank financial charges etc
Total Cost for items 1, 2, 3 and 4 is 250rm. per acre. I am quite satisfy to net a sum of 300rm net per acre/month

Your advise is appreciated and I, owing you a "teh-tarik"

---

Added on August 1, 2008, 4:46 amHi Jordy,
Today, a plot of CHGS is priced 8000rm and all other terms remaining the same as the 5500rm scheme. For the first 3 years, at 5500rm, you are paid 8% and at 8000rm, you will be paid 8% also, but less (-) the prorated 365 days x 3 years in guarantee from the scheme. This was what I understand. Somehow, what interest me is that, what good reasons that make you withdraw from the scheme. This can benefit others who are now interested to invest/or not with the new price of 8000rm scheme.

The overall yearly return from the investment per plot seems reasonable (of course, with strict-proper management), but I do contemplate that at the end, there is no certainty to the VALUE of the invested 8000rm plot. The ASB or similar, too pays to the near percentage as to the yield, but you can expect the invested sum of 8000rm return full after a period of 23 years.

Also, for the interest of new 8000rm or old 5500rm investors, what sort of guarantees that you will be paid yearly, on the maturity of the investment. (considering all the factors MPOB Palm Oil Prices, CPO etc. remains throughout good (e.g. at present level) for 23 years)

Well, Jordy, your reasons please, from your professional point of view. THANKS.

This post has been edited by greenland123: Aug 1 2008, 04:46 AM

Hi greenland,

First let me introduce myself. I'm the consultant for CHGS and we also have under our arm clients who exports palm to the USA in a region of 50,000 m/ton a month. Since you have many questions on CHGS, would you like to have yumcha session at our office in PJ? It would be easier to answer all your questions at one go. If you have technical questions on the oil palm industry we also have industry experts who are currently dealing in oil palm to answer your questions. Do pm me if you would like more information.

As to your question on what happens if the project becomes insolvent ie. if the company becomes insolvent? In this situation, it means that CHGS is exiting the contract prematurely (less than 23 yrs). Under the agreement/contract, BHLB Trustee will sell the land, fruits & redistribute it to all the investors. So in the worst case scenario, you will be compensated on the current land price at the particular year as well as proceeds from the palm oil. On current comparison with land value of palm oil land above 100 acres in Malaysia, it ranges around RM25,000-28,000 per acre for non-managed land (meaning cost without management co.).

To others who are interested to find out more, there will be a presentation and get together next week about CHGS and what is the latest developments. Do pm me if you wish to attend. Cheers and have a good day.

This post has been edited by DannyOP: Aug 1 2008, 10:51 AM

Hi DannyOP
Thanks for the reply and your invitation to "yamcha", but I'll take the raincheck.

Refer to your Para 2, can you elaborate further on examples with mathematics i.e.
At the present offering price of 8000 RM per lot i.e. x 4 to make up an acre = 32,000 RM per acre, and BHLB Trustee managed to sell the land at 8,000 RM per acre, (after deduction all the losses). the final sum distributed therefore is 8000 RM from an investment of 32,000 RM., resulting in a loss of 24,000RM for the Grower with an acre or 4 lots. In this case, the Grower's Investment of 32,000RM can only break even after receiving several years of the yield income at 12%. Is this the possibilities at the worst scenario of insolvency?.....

Have a good nice weekend.
GREENLAND123

6 plots of Country Height Grower Scheme for sale.

Initial price RM 5000
Last traded market price RM 5500
Offer price RM 5400

Interested, place contact 016-9755888

Lol, you placed this at the wrong place bro

Just one simple questions here, sorry if it was asked earlier.

Lets say i buy one lot from a seller for RM8000. Does it mean that i only need to wait 2 years more (at 8% annual interest) before the plantation mature and start yielding 11-15% interest? Or every change of owner, we have to wait three years again?

If I am not wrong, you will wait for 2 more years. The important question to ask would be after the appropriate certificate transfer etc... would the company pay you 8% of $8K or 8% of the original purchase price. I would think it would be the latter since this is based on willing buyer & seller.

People with the know please confirm.

You just have to wait for the plants to mature to start earning. But your yield will depend on the price range of CPO for the period.
Now CPO is on the way down, and it has been on a downtrend for quite long. So hopefully bu 2 years, it does not go below RM2,000.
Else, your yield will be greatly affected. Check back at the returns chart to see what yields you would be getting.

It is 8% on the going-price. If the price now is RM8,000, you would be getting 8% based on this price.
Likewise, if the price is RM9,000, then you would be getting 8% based on this price.
But I have forgotten most of the details though. Might need to refer back to your agents

Hi Mr. Michael J.,

Any idea how much is the average price of a freehold oil palm estate wif 50% old tree & 50% new tree on a pc of land >600acre located in river delta area in Perak would be reasonable?

Btw, what do u think of Guthrie's Chaemera seedlings? Is is a good variety?

This post has been edited by D-Tourist: Sep 8 2008, 11:11 PM

Hi Greenland,

To understand whether the co. can be insolvent, I have to inform you a bit about the co.'s P&L and the Bank Trustee reserve funds. Put it simply, a co. will only be involvent if they are run poorly or if their reserve fund + sales proceeds can't cover the cost over a prolonged period of time. At the moment, +/-30,000 plots have already beeon sold with sales of over RM195,000,000. Worse case scenario, if the funds run out and the zero production for every year right? Although almost impossible, lets assume the dire worse.

Sales collected from plots sold - $195,000,000
Expenditure over past 5 years (read prospectus on www.chgs.com.my) - $4.5 million

Leftover funds RM190,500,000
29% Reserve Kept by BHLB Trustee to ensure 1st 3 yrs dividents are paid and balance 6% contingency - $56,550,000

Balance sales proceeds - RM133,950,000 (excluding balance of 4,000 plots on sale (rest is owned by management co.))

So the question lies is, how long will RM134,950,000 last after the 4th year? IF zero production and every year there is nationwide monsoon for 24 hours a day, then the RM133,950,000 will last another 135 years or so based on the expenditure over the last 5 years. Nevertheless, this investment scheme is only until 23 years (max holding period 1 year). Furthermore, the funds are held by BHLB Trustee as a guardian for investers & only when all the conditions are met on the trust deed then only certain funds are released.

So to answer your question, in other words, no, the co. will never be insolvent.

Secondly, BHLB does not receive and profits nor deduct any losses from the management co.. BHLB Trustee is only the custodian of the land title as well the funds and acts to safeguard the investment. So, to answer your question on sales, whatever profits or losses of the management co. does not affect BHLB Trustee.

There are only 2 realistic risk, ie. :-

1) Since it is a land based and long term investment, the liquidity is less compared to normal bank savings account. On average, it will take approx 1 month to sell your plots during normal times, should you decided to do so after 1 year. It is just like buying property. Even in a hot location in Mount Kiara, it will take some time to sell.

2) On the 4th year onwards, your dividents are based on the yearly average CPO price (up to 12% if price is above $2,100) & bonus 1-5% based on FFB. So best case scenario (cpo above $2,100) you will receive 12-17%. Worse case scenario if price goes down to production cost (cpo $1300-1500) then you will receive 4-5%. In any case, still higher than bank FD.

As to your question price sold, there are 2 types of sales :-

1) Sales before maturity of contract (23 years). Lets say you bought it at $5,000. To sell it today at minimum par value is definately sellable as we have a network thousands of current investors and more future investors. Furthermore the price is already RM8,000, going to be RM8,500 soon. To sell it at a higher price is also possible within reason. Benghooi for example, wants to sell his previous lots bought at $5,000. Our co. is now handling the sales of his plots. When the sale is done, you will get a further idea on what is the realistic price to expect as a real world example.

2) Sales at maturity of contract (23 years). At maturity, this is what we recommend all investors to hold, as this will be the biggest windfall and is also a protection for inflation. On average, you can expect what plantation lands have been sold over the last 20 years compared to now, which is almost a 5 fold increase, depending on location. The price will depend on :-

a) Average palm oil land prices. This is also depending on CPO price 20 years from now and its by-product which is mostly food based ie. cooking oil, chocolate, cereal, vitamin e & a small portion on biodiesel and cosmetics. For layman, just compare food prices eg, the price of chicken rice 20 years before and today. How much was then and now. Today it is RM4.50 for my fav chicken rice, how much do you think it be in 20 years time? This is rhetorical question. Similar to palm oil which is a food based commodity.

b) Amenities and location. The CHGS land is directly next to the Gua Musang highway and next to it is Felda with 100,000 acres of land. 1,000 acres have also been reserved for the mill. Also depends on surrounding area developments.

c) Whatever that FFB that is harvested on that particular year will also form part of the sales proceed of the plantation. Eg 25 metric tons per hactare x 4545 hectare x RM2,500 FFB profit per hectare in 20 years (should be a lot more) = RM284 million just from the sales of the FFB alone.

---

Added on September 10, 2008, 2:22 pmHi Silencer,

To answer your question, the 8% fixed guaranteed returns is until 2009. 2010 onwards, it will follow the CPO price. On estimation if CPO is RM2,100 average or higher a year then you will receive 12-17% dividends. So if the plots are transferred to another owner, before 2010, then you will receive 8%, if after that then it follows the CPO price. Hope this clears things out.

---

Added on September 10, 2008, 2:37 pmD Tourist,

Sorry if I answer first before Michael J,

You can get the transaction prices from MPOB. I can give you an indication from our last year's prices we got from MPOB. The average transaction price is $28,000-$32,000 per acre.

Of course, there may be variations depending on many factors :-

1) What is the average yeild per hectare
2) Is there any mill on the plantation, and if there is not,
3) How far away is the next mill?
4) What are the prices offered for the FFB from the mill
5) Are they good paymasters?
6) What are the surrounding areas and aminities?

This post has been edited by DannyOP: Sep 10 2008, 09:37 PM

I've got confirmation that 8% is based on the original price, if the transaction is based on willing buyer/seller basis without involvement of the mgmt company. If you buy from the mgmt comp, then will be based on prevailing done price.

Am trying to confirm that the subsequent return (after planting stage) is also based on original price, if transaction is based on willing buyer/seller.
----

Yeap - confirmed. All subsequent return will be based on the original price.

So, be careful investors. If you buy directly from a seller (other than the company), your returns are always based on the original purchase price.. (& not the price you paid)


This post has been edited by Justmua: Sep 11 2008, 04:57 PM

Thank you for your confirmation. Yes, I have forgotten to include that your return will be based on the going price, IF you have bought the plot directly from the management company

Thanx for the pricing. From wat i understand the yield is only in the region of 0.6-0.8 per acre per mth due to the older trees. Several mills (3-4) are located within a vicinity of 45min -1.5 hr away. Extraction rate around 19% and are goodpaymaster. Surrounding is river, and mainly agricultural lands with limited amenities.

Woh, all so complicated calculation. Pengsan sajalah

But put it in simple terms, I buy plantation land at say RM3000 per arce, sell to yoyos at RM30000 per acre and promised them return of 8% or more, even if everything goes under, still no problem mah. So who want to invest in my scheme yet to be determined? Need $$$ before can afford to go buy land lah

No problem. Actually what do you mean by 0.6-0.8 per acre? Do you mean metric ton? If that's the case then in a year it will be at 15-18 metric ton/hectare, yearly returns will be less than 5% which may be the reason why they want to sell. The returns would be even lower than CHGS and much higher risk(see my calculation at the bottom section). Normally yields are counted based on mt/hectare. On the average :-

1. Poorly managed plantation (ie. govt based) - 15-18 mt/hectare
2. Well managed plantation ie. Private managed plantation - 20-30+ mt/hectare

Bottom line, eventhough I'm a consultant for CHGS, I have to say a privately owned plantation has the potential to earn more if it is managed properly, if there is ecomonies of scale (your investment must be large enough to make it worthwhile), if the yields are good and thirldly if prices are good (from the mill & the FFB/CP) prices) (you notice that there are many ifs). On a good year (particularly the last 1 year), most plantation companies like IOI & Sime Darby earned more than 50% profits. However the risk is also much higher, that is why you should diversify your portfolio so that you have something to cover your expenses during the downtimes.

Actually some of our large investors (those who invest more than RM1 mil) are oil palm plantation owners themselves, which I find it quite unusual. One question we usually ask them is, since you own your own plantation, why would you consider investing in CHGS? The answer they usually give is, yes, their current returns is higher during good times but along with higher returns is also bigger headache managing it. They have to be there personally to monitor everything runs smoothly.

Basically CHGS is not meant as an alternative to high risk high return ventures, but as an alternative to long term savings, FD and property investment, or to suppliment your high risk investment during bearish times. Why?

1. Basically it is a 23 year good interest bearing investment (ie. 8-17%).


1st 3 years (until 2009) - no matter how high or low the CPO price, returns are fixed at 8%.
4-23rd year (2010 onwards) - returns are based on CPO. AS long as it is above 2,100 yearly average then you'd be getting 12%. If FFB (yield) is 20mt/hectare above, there will be bonus 1-5%.

So, in other words, the yields are only a small percentage of your divident returns. Even if for example, we get 15-18mt/hectare (ie no yeild bonus), there will STILL be an average of 12% returns pa. Worse case scenario if the prices drop until production price of 1300-1500, you'd still be getting 5% returns pa which is higher than FD. However price dropping to production price is very unlikely due to oil palm being a food based commodity. Do you think that your chicken rice will drop from RM4.50 to RM2.50 in the next few years?

2. There is no risk of foreclosure or loan default. Unlike buying land/property which runs into hundreds of thousand/millions and puts you into debt immediately, CHGS is a cash investment/long term savings. At RM8-10k, most people who have worked for a few years can afford to invest. There is no risk that halfway you can't pay your loan and forced to sell etc.

3. There is flexibility. You can still sell your plots, as long as you hold it for 1 year and above. It is much easier to sell a RM8,000 interest bearing plot than something that costs 10 or 50 times the price. For examply, if you have invested RM80,000 you don't have to sell all, only what you need in parts of 8,000. In comparision, if you own a RM80,000 medium cost apartment, you can't say I just want to sell RM8,000 of the guest room. So in other words there is flexibility.

4. Your investment or capital is protected by BHLB Trustee (under CIMB) as the land title is held by them as well as all payments go through them. Only if all the conditions of the trust deed is met then only they release funds that are needed. Furthermore, 29% of each dollar invested is kept by BHLB Trustee to ensure that during the most difficult times ie. 1st 3yrs of plantation, the 8% fixed returns are paid out to all investors. The balance 5% is kept for contingency purposes. So if anything goes wrong, BLHB Trustee can still sell the land plus proceeds from the palm oil and redistribute the capital back to the investors, or, if 75% of the investors agree, appoint another management co. to takeover from the current one. On another scenario, if you take a loan to puchase your own plantation land and your business fails, your millions of dollars in capital is gone as well.

5. It is a land based investment + food based commodity grown on the land. So you get the best of 2 investments as well as inflation hedging and capital appreciation.

---

Added on September 15, 2008, 4:20 pmlol if so easy everyone also do the same thing. D-Tourist also knows pricing for fully equipped plantation which is planted with high yield seedling, good soil type, proper road access within the plantation, mill etc etc doesn't come at RM3,000 per acre. Similarly equipped plantation costs approx RM8,000 20 years ago, still much higher than RM3,000 that we all wish for. Even D-Tourist's quoted was RM30,000/acre (which is not high yielding) is very much the going price now. Could be higher or lower depending on suitability and yield of the plantation.

You can get very cheap land in Indonesia, but from our feedback from Indonesia planters, they are mostly jungle land seperated by hills. After all the development and amenities that is invested to make it a suitable plantation land, it cost is not much different from what Malaysian land is going for now.

Furthermore, you can't buy 1/4 acre of plantation land outside and hope to make money of it. Min. investment in will run into the millions.

IF you own your own plantation, how much can you earn and how much to invest to make it worthwhile? :-

1 hectare = 2.2 acres
Price per acre = 30,000

1. Lets say your production cost is at a low RM1,300
2. FFB price is RM1,500
3. Lets presume you manage to harvest 20 mt/ hectare
Gross profit per hectare = 20 x 200 = RM4,000

Gross profit for 500 hectares (1,100 acre) = RM4,000 x 500 hectares = RM2 million.

So for RM33 million investment, you only get back RM2 million. How many percent return is this? Approximately 6%. If you manage to harvest twice a year (The fruit takes five to six months to mature from pollination to maturity), returns are 12% max (So now do you know why some of our large investors are planters themselves? It is more worthwhile venturing into your own plantation if you have your own mill, which alone is another RM25-30 million investment. If you have your own mill, then your profits are much higher as they are based on CPO rather than FFB.

---

Added on September 15, 2008, 4:32 pmUpdate, new phase of CHGS plots is going for RM8,500.

This post has been edited by DannyOP: Sep 15 2008, 07:14 PM

Mmm... Sorry for the late reply D-Tourist. Have been really busy of late. And please, just call me Mike, or Michael if you feel that's too informal.. hahaa...

As Danny has pointed out, RM28,000 to a maximum of RM30,000 is considered a fair price for lower Perak region, as long as it isn't peat soil. From how you're describing the land, I have an idea where it is located, and the area is actually flood prone. Some flood mitigation had been done in the area, but not all the planters there had participated in the operation.

Regarding the seeds, let me put it this way: As long as it is coming from a certified producer, the material is good in terms of yield. All seed producers have to follow the minimum SIRIM standard for oil palm seeds. However, given the strong competition for the oil palm seed market, none will go for the lower spectrum. What you may want to consider are things like palm characteristics, which will affect the plantings on different terrains. Sime's (Golden Hope, Guthrie, and Sime) are characteristically more vigorous palms, meaning they grow taller faster. This might become an issue for harvesting when the palms are 12-14 years old and beyond. Also, note that more vigorous palms tend to suffer more stress on elevated soils than shorter palms, and have a tendency to lean on softer soils like peat.

Just a quick guide for seed selection

Felda
Yangambi based material, which has very high bunch number, good oil production. However bunches tend to be smaller in size, with thicker shell and bigger kernel. Palms are moderate vigour.

Sime (inclusive of merged companies)
AVROS based materials, which are notably vigorous. Moderate bunch number, with moderate bunch sizes. Good oil profile, and high oil yielding. Also noted to be very uniform in growth.

United Plantations
A class of its own. UP's selected materials are known for very high oil yields in excess of 30% lab extraction, and oil yields per hectare between 6-7 tonnes. Moderate bunch sizes, and moderate bunch numbers, but capable of reaching 35 tonnes per hectare.

IOI
AVROS based materials, similar to Sime's performance. However, recent selections have edged its oil production closer to what UP's materials are capable of.

AAR
Good planting materials. Refrain from commenting.

These above are considered to be large seed producers.

Other producers (now no longer available) are Unilever's Pamol, and SOCFIN. Both of these producers have materials similar to UP's. Check ex-SOCFIN's Johor Labis estate, you will know how good it is (OER around 23-24%).

However, one note of caution: There are now many fraudsters selling oil palm seeds illegally. These seeds might be from certified producers, but the "agents" they have no permission to sell seeds. Also note that seeds are sold as GERMINATED SEEDS, so any ungerminated or "preheated" seeds are most likely fakes. Needless to say, if the reseller cannot produce a certificate to attest the legitimacy of the seed source, they are likely to be those dug from under the palms, i.e. non-hybrids.

Please be careful about this, as the demand for oil palm seeds has become overwhelmingly high, and just as what happened in 1984, fraudulent sale of oil palm seeds nearly killed the industry. Be responsible, and buy only certified seeds.

Other than that, I believe Danny has given a very good explanation of things.

PS: Checked the latest CPO prices? Already below RM2200 lei.... The forecastings were correct all the while... And just a hint, South America is planning to flood the market with oil crop.

thanks for your explanation michael.. u sound so knowledgable on actual palm oil plantation, are you a planter yourself?

Since this topic is on CHGS investment, let me address of the current concerns ie. CPO prices going up or down.

CPO prices is only relavent for these 2 years if you are a commodity trader who look into daily prices of CPO, but this does not affect the CHGS investment. During these difficult times investors in CHGS are protected and still receive a fixed 8% yearly dividens. For land based investment as well as property investment it is meant for the long term to hedge against inflation and to gain capital appreciation as well as rental income. When investors purchase property or land investment, they too do not look into the daily prices of the investment as they know in the long term land prices will go up, and if one is into the food based commodity eg palm oil then you will also know that food prices will grow up in the long term due to its strong fundamentals :-

1) world population growth - more people means more food is needed. The population is growing in an exponantial rate. Supply will not be able to catch up. Demand > Suplly = price increases
2) scarcity of land - less and less land is available for plantation and as land is getting harder to obtain, prices will go up. This is the same for property investment.
3) Inflation - yearly inflation means the production cost will grow up, this in turn will increase the selling price ie. CPO or FFB.
4) Other smaller areas such as implementation of biodiesel and newly found sources of palm oil ie. vitamin e which will be able to tap into the billion dollar medical industry.

This post has been edited by DannyOP: Sep 17 2008, 04:35 PM

Hi Danny, you're quite close. I'm not an agriculturist, but a field-based plant scientist.

Mmm... I agree to an extend about what you noted there.

I'm with you on the first point, especially because vegetable oil is the cheapest source of calory. Palm oil is not only higher in calorific content compared to other edible oil crops, the oil palm is also the most productive oil crop in the world. On a per hectare basis, oil palms produce more than 3 times the average product of rape seed, soy bean, or canola annually. Hence, this makes palm oil highly desirable as an edible oil source.

But it is also this high productivity that stumbles point number two. Although land scarcity will make land prices expensive, that does not mean it will drive prices up. As agricultural practices become more efficient, the productivity of the land can be increased dramatically, which means you need less land to produce more. Let's just take one well known plantation as example: United Plantations Berhad. While the national average for palm oil production stands at about 4 tonnes per hectare, UPB has managed to up their productivity till 6-7 tonnes CPO per hectare. So for the production of say 100tonnes of CPO, an average plantation might need 25ha; UPB would only need about 16ha. Furthermore, oil palms are perennials, not annuals. With sustainable agricultural practices, it would be possible to retain the fertility of the land so that cultivation can continue for more than 100 years. Certainly, UPB has done that. Hence, land scarcity is not a major issue for existing and near future oil palm cultivation IF sustainability is maintained.

For non-plantation purposes, land scarcity will drive prices up, and yes, the demand for land will lead to higher valuation of plantation land. But that is deemed appreciation value on the property, and it does not mean it will translate into the cost of the final product.

About inflation.... if production cost goes up, will that really mean selling prices will go up? 1997-1998 was a pretty bad year for all oil palm growers; CPO was going for RM700-800 per tonne then. RM700-800 per tonne CPO at current costings means certain death to the plantation. Do take note that the average production cost at that time was almost 80% of the selling price of CPO, and many plantations folded. Similarly, the current pricing of CPO runs the risk to be a repeat of history as average costings stand at about 40% selling price.

Of course, as with most other commodities, CPO prices will not keep its downward spiral, and in two years time it might rebound to greater heights. But how certain is this? Look at other crops as example: Cocoa, coffee, rubber. All of these plantation crops used to be worth their weight in gold, but now have such low profit margins that they are not suitable for conventional large plantations.

On this respect of inflation, what should be looked at is not so much about the pricing, but the translated cost of production. Like the UPB example given earlier, if the plantation is efficient, then the effects of inflation is spread more sparsely. Right now palm oil is still traded close to the pool system, but what will happen if an efficient producer decides to sell his oil at a lower price? His profit margin will still be high, but his pricing will be lower than all the rest, which makes it more attractive. Although this may not make sense for conventional economics, there is sound logic for doing this.

Let's leave biodiesel out of the picture; the EU's new policy cleary shows that there is a bleak future for biodiesel. Only the US seems keen on it (makes sense seeing what they have done so far). Vitamin E, Carotene complex, and other nutraceuticals might lead to a niche market, but honestly, this is a downstream activity. Unless the plantation also has the facilities to extract, process, and package those products, this kind of niche market is immaterial to the plantation.

This post has been edited by Michael J.: Sep 17 2008, 05:59 PM