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What’s common between India suddenly abandoning wheat exports and Indonesia changing its palm oil export policy twice in a matter of three weeks? Nation-first approach? Well, addressing global concerns and concurrently pacifying domestic markets by maintaining price stability has become a herculean task for governments across the globe.

If any single phenomenon affects the fate of all politicians the most, globally, it’s rapid inflation. When the food platter of the common man gets expensive, irrespective of the country of residence, approval rating of political parties takes a knock.  

Therefore, as investors we must be careful of what we buy and sell and why.

If anyone keeps accumulating and shunning stocks randomly based on the latest news flow, making money in the stock market might become challenging.

So what do we do as a first step?

Never miss the big picture.

Thus, to understand the latest price performance of palm oil and its implications for Indian investors, let’s see the big picture of global palm oil trade and its price correlation with other oil varieties.

Palm oil has peculiar advantages—highest yield per hectare and affordable prices.

Palm oil is the most widely used vegetable oil globally and accounts for 60% of vegetable oil consumption. It is smooth in texture, odorless, tasteless and colourless and it acts as a natural preservative. Thus, it finds applications in almost everything that we use daily. 

Nearly 70% of cosmetics have palm products as an ingredient and half the packaged food we buy at grocery stores and quick services restaurants contains palm oil. Moreover, it is also used as a biodiesel and animal feed.

As compared to other major vegetable oil sources, palm oil offers the highest yield per hectare (of around 4 tonnes).  Other competing oilseeds produce 10 to 40 times less oil per hectare. This makes oil palms a sustainable crop and palm oil an affordable oil. Over the last two decades, palm oil has traded at an average discount of 17% and 27% against soybean and sunflower oil, respectively.

Godrej Agrovet

The top two producers—Indonesia and Malaysia—control 85% of the global palm oil production. Such a high dependency makes global supply chains vulnerable to periodic shocks and in the absence of affordable substitutes, replacing palm oil in global supply chains has become a challenge.

Palm Oil

Why does the palm oil supply chain now appear unsustainable?

Between 2020 and 2050, global palm oil consumption is expected to rise steadily at a 4%-6% compounded annualized rate. And considering the threshold of existing dominant producers, diversification appears the only way forward.

Monoculture plantations have already endangered biodiversities in some of the major palm oil producing nations, environmentalists claim. The top two palm oil producing nations, of course, deny these charges, labelling them as motivated campaigns of canola and sunflower oil interests in Europe.

Which side has more points to score? We don’t know. But what’s amply clear is that global supply sources of palm oil must be diversified.

How do supply disruptions in palm oil affect India?

Nearly 60%-70% of India’s total edible oil imports pertain to palm oil. The 5-year average of edible oil import volumes of India has been 14.1 million tonnes. A back of the envelope calculation suggests that India spends around Rs 60,000-70,000 crore on palm oil imports. Therefore, domestic cultivation offers import substitution opportunities.

At present, the land under oil palms is 3.7 lakh hectares in India, whereas, the country’s oil palm cultivation potential is approximately 28 lakh hectares. The National Mission on Edible Oils – Oil Palm (NMEO-OP) endeavours to increase the area under cultivation to 10 lakh hectares by 2026. Rs 11,040 crore has been the estimated outlay of the scheme.  

The economic life of the plant is around 30 years and the crop takes about 4-5 years to produce adequate fresh fruit bunches to make any commercial sense.Malaysia

Nonetheless, palm oil is said to be unfriendly to heart health but like many other topics, this also remains a bone of contention amongst experts.

No wonder then, cold-pressed traditional edible oils are in vogue amongst health cautious people nowadays. And they fetch a premium to producers. Ironically, Indian jails produced these premium edible oils for free in the pre-independence era. India’s unsung freedom fighters were yoked to crushers (instead of bullocks) at oil mills as part of excruciating punishment for demanding freedom from Colony Raj

But in the process of the world becoming a global village, independent India developed a dependence on imported palm oil. Should India use its diversity to its advantage and strike a perfect balance amongst the varieties of oil used? And how is India’s experiment with domestic oil palm cultivation going to look like? Do let us know what you think.

Which Indian listed company has a presence in the palm oil sector?

Godrej Agrovet is India’s largest player in the palm oil sector. It runs five oil palm mills across the country and at present is playing a vital role in India’s 20% oil palm development through direct engagements with farmers. 

Oil Imports

Godrej Agrovet is a signatory and member of various action groups of the World Wide Fund (WWF) for Nature that promote harmony between human and nature. In FY22, oil palm businesses accounted for 14.4% of its revenue and 35.4% of Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA). Animal feed and crop protection are other two important business segments of Godrej Agrovet.

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Disclaimer:

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.

We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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