Ladang Sawit

Last year many investors hoped that the inexorable rise in the global population and demand for food would bolster agricultural raw materials’ prices in a global economy downturn. But this slowdown has shown that while everyone must eat, “they can eat less or more cheaply”, says David Fuller on Fullermoney.com.
However, many agricultural commodities are trading at major discounts to their long-term average in real terms.

After slumping by more than 50% last year, agricultural commodities like corn, wheat and soybeans have rebounded by 20%-25% from their December lows. Investors have been looking forward to smaller harvests later this year. Drought-stricken Argentina, a key exporter, is on track for its lowest soy production in at least five years, reckons Pablo Adreani of Agripac.

This may cause the demand of palm oil to increase later this year since palm oil is always the primary substitute of soy oil in edible oil industry.

Also, recent drought in China is expected to push the crude palm oil price to recover faster from its 70% drop last year. Although the current price of RM1900/ton is still more than 50% lower then its peak of RM4300/ton in March 2008, the price has recovered by 46% from its low of RM1300/ton in October last year.

The weather remains a “wildcard”, and smaller harvests could bolster prices later this year. But for now supplies don’t look too stretched, given last season’s record harvest.

Even so, demand of palm oil is set to rise…

Why now?
Despite the recent recovery sign in agricultural commodities, palm oil price has been depressed by the concern of recession for more than half a year. In the second half of last year, we still remember while crude palm oil price was already on its downturn slope, we still saw most sellers of oil palm land unwilling to lower their price. We believe it was because these sellers were less in touch or ignorant with the global economy situation.

Until end of last year, their attitude became softened after they have been selling their harvests at lower and lower prices for months. Now at this juncture, almost everyone in Malaysia is aware of the slowdown in economy. We are surprised to see pessimism comes with such a slow pace in the country.

We believe now is a good time for you to start looking for oil palm land. In the coming months, you may be able to get prices much lower than what you might have been offered last year. For example, smaller plot of land (less than 15 acres) with 10 years old oil palm trees was asking for up to RM80, 000 per acre in some area of Johor last year. Now you may consider bargaining for RM55, 000 to RM65, 000. You may even offer RM35, 000 to RM45, 000 in some area for larger acreage (above 30 acres).

If you intend to operate the oil palm land yourself, however, bear in mind that most of these lands are not investments that worth borrowing or financing, yet, though worth investing. (Read our previous articles How to know if a property investment is worth investing? and Why you want to take up a loan for your real estate investment? to learn how to know if a real estate investment is worth investing or borrowing.)

The average operating cost per acre is about RM150 per month right now. With the current palm fruit price (around RM320/ton), you may only get 3.7% of annual return from the operation of a 10-year-tree oil palm land with the purchase price of RM55, 000 per acre.

With our special property investment evaluation spreadsheet (which you can download it free by subscribing to our newsletter), we estimated only when the crude palm oil price reaches RM2600/ton (palm fruit price RM430/ ton equivalent), the oil palm land will become worth borrowing at the purchase price of RM55, 000 per acre, assuming same operating cost.

If you intend to invest for long-term return or be a land-player, take your position this year and you may expect to see significant return for the next 2 years with a ride on the return of inflation.