Can Palm Oil Go Green?

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One of the uncomfortable facts of being eco-friendly is the realization of just how many eco-unfriendly products exist right around you.  Buying everything from ice cream to shampoo, for instance, often involves the purchase of palm oil, that most thorny of all commodities, so useful for almost everything but so harmful to the environment.  That may be about to change, however, as certain initiatives throughout the palm oil belt of Oceania and Africa have created a new green palm oil product that does not rely on the destruction of rainforests and old-growth regions in order to power the global demand for palm oil.  As palm oil goes green, furthermore, it also become more of an investment engine.

Troubled Past

An individual palm oil fruit resembles a chile pepper or a very large raspberry.  It's a red oval about the size of a thumb that has created one of the largest new economies in the world over the course of only the past twenty years.  Global vegetable oil consumption has risen precipitously, as evidenced by the number of US farms that stopped growing corn in order to plant soybeans, but nowhere has been more affected by the oil market than the rainforests of Malaysia, Indonesia, the Philippines, Thailand, and central Africa.  Palm oil demand has risen from about fifteen million tons per year in 1995 to over sixty million tons today, while the price of the commodity climbed from $300 per metric ton in 1993 to today's price of $575 per metric ton, with a stopover above $1250 during 2011.  Palm oil has been a rallying cry if environmentalists the world over.  In order to plan palm trees, countries must plow up fertile tropical forest, destroying endangered species and releasing greenhouse gases into the atmosphere.  The public image of many palm oil companies, as such, has hardly been pleasant, yet negative publicity hasn't stopped major markets (most notably the US) from consuming huge quantities of palm oil.  Since palm oil can serve as a biofuel, furthermore, interest groups promoting sustainable energy clash with those interested in preserving the virgin forests of Malaysia and Indonesia, where 90% of all palm oil is developed.  A few green solutions have made the commodity far more palatable to all parties involved, however, with ample hope for a sustainable future.

Change Comes Swift

2004 would be a watershed year for palm oil.  Global demand surpassed 30 million tons per year; prices went above $500 per metric ton for the first time in history; major conglomerates created the Roundtable for Sustainable Palm Oil (RSPO) out of governments and private entities.  The RSPO managed to get the governments of southeast Asia to agree to pacts that ceased the destruction of old growth rainforest and to only grow oil from land that growers had the rights to farm out.  These practices helped to begin to curtail the slash-and-burn agricultural practices that devastate rainforests in Oceania, Africa, and Latin America.  The RSPO certification made headlines and prompted a number of eco-conscious food companies in the US (such as Whole Foods) to buy only the certified products.  Today, the percent of world consumption of RSPO certified palm oil stands at nearly twenty percent, having doubled in just the past four years alone.  Some critics nevertheless claim this rate to be too slow: famously, Greenpeace launched a campaign to link the consumption of Nestle chocolate (made with a liberal serving of palm oil) with the destruction of forests inhabited by orangutans.  As a result, Nestle announced they would switch their supplier to Golden Agri, the first Indonesian palm oil company to stop deforestation in order to grow their crops.  This proved to be the start of a domino effect: big palm oil consumers like Unilever followed suit, eager to gain attention and the moral high ground to draw more customers.

More To Go

If the plight of orangutans does not stir your conscience, perhaps the financial impact of the palm oil certification movement will.  As any businessman or woman knows, the introduction of restrictions on business will make any business less efficient.  That would be bad news if you were to invest in palm oil company stock, but it's good news for those with holdings in the commodity itself.  Palm oil currently trades at five-year lows after the halcyon days of unlimited deforestation and planting.  At a time when the industry is trying to make itself into a green entity, they'll likely be unable to meet the massive and ever-growing global demand.  The industry leaders claim they are capable of growing about 20 to 30 tons of palm fruit for each hectare of land from rainforests; that number comes down by almost half if forced to plant and harvest palm trees from plantations.  "Secondary" forests, or forests that have been allowed uninterrupted growth for 20 years, represent a slightly better growth option but may be off the table if big companies like Sime Darby agree to new RSPO guidelines that limit any and all planting in forested territory.  They're adhering to the Indonesian political decision to cut CO2 by a quarter at the conclusion of the decade, a decision that will hamper the growth of palm oil, push demand upwards, and save the orangutan all at the same time.

In Your Palm

  • The Takeaway: the value of palm oil is very strong and the price is right.  Buy futures of palm oil for delivery in January of 2016 and take as high a limit as possible (currently trading on a high of $575).  Don't aim for delivery after the spring harvest season, as a larger crop can water down earnings.  There is, alas, no ETF or mutual for palm oil despite the popularity of the commodity, but you can invest in palm oil indirectly by adding IOI Group stock into your international large-cap holdings, as they're one of the world's largest producers.
  • Palm oil will likely hit a bull market by the end of 2015 and most growth will come very quickly: during palm oil's previous bull markets, the commodity grew by $100 per metric ton per month.  That makes it an excellent grower, but investors must be patient and not sell off their holdings at the first good stretch of 4-6 weeks.
  • Unlike some other oil foodstuffs, like soybeans, palm oil doesn't have much use as livestock feed.  While the price of hogs and cattle often rise with the increase in the price of soy and corn, don't expect a similar bump in meat commodities.

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