13/7/10 THE FALLACY OF AN OIL PALM INVESTMENT RETURN.....

(Miring, an Iban custome, a mean to give an offering to seek the almighty blessing for safety, prosperity and unity among the communities and those responsible to bring good to the society. A real humble and simple wishes!)

Land has been traditionally classified as one of the key factor in Investment consideration. For the Natives of Borneo (even South Pacific Nations), and particularly in Sarawak, land that they traditionally hold are mostly classified as Native Customary Right (NCR) land. Since, Sarawak in particular, where the population are rural-based, thus in order to improve the rural Quality of Life (QoL) and Income, the Government need to develop these land. The high poverty incidence in the rural of Sarawak makes it an urgent need for the Government to really turn all these lands into Rewarding Economic Assets not only for the landowners but as well as a means to promote the State Economic Growth.

(2) Nowaday, in view of the emergence of the Chinese and Indian economic power, the ever increasing demand for Cooking Oil from these two nations offer a great prospect for the Oil Palm Plantation Development. Couple with labor shortage and favourable climatic regime, these made Oil Palm as the best choice for the NCR land development. The prospect would becoming better if the cost of Fuel is kept at the high side. The soya bean, maize, and all those annual Vegetable Oil Crops would never be able to compete with Oil Palm both in term of Yield and Cost of Production. These annual crops are High Energy (Mechanization) and fertilizer Inputs which are mostly derived from petro-chemical products.

(3) The major issue facing the Government in developing the NCR land, is then to source for Development Funding. Since 1969, the Sarawak State Government (GOS) had been depending on public funding for such purpose. various Public agencies had been tasked to undertake such responsibility. Nonetheless, in view of Funding Limitation, the growth of NCR development for Plantation purpose had been progressing rather slow.

(4) In 1996, GOS made an initiative to get the Private Sector to participate in the NCR development without discarding the role of the Public funding. In short, the private-funding initiative was formulated and launched to complement the Public funding in order to speed up the NCR development. The concept is rather simple, ie all Development Cost of the NCR land is funded through private borrowing, thus without the benefit of Public subsidies either through grants or low interest borrowing.

(5) Unfortunately, as the pressure to meet the ever up rising living cost, the Private Sector-based NCR development had been widely question. In simple words, the NCR landowners want quick return to their land, which couldn't be easily met by the Private developers. Thus the issue is not wrt the Development per se, but more of Supportive Income!

(6) The NCR landowners always accused the Private Developers as cheating them for not able to give the landowners quick and good return. Their argument is based on the believe that, if they develop the land on their own, they could get faster and better retun as compared to if the land is develop by the Private Developer.

(7) In actual fact, to claim that owner-developer can generate faster and better income as compare to Private Developer is a mere great Fallacy. This I would argue along the following facts:

(i) To develop a hectare of land for Oil Palm till maturity ie three years after planting, based on current price at least RM15,000.00 is needed. Upon maturity, ie in year four and onward, a maintainance, fruits harvesting and transpotation cost amounting about RM4,500.00-6,000.00/ha/year would be needed. All this cost is with the assumption that all works are done on contract basis.

(ii) Based on current factors, an Oil Palm farm would bear about 5-8 Mt/ha/yr in yr3-4, and about 8-10 Mt/ha/yr on yr 5-6, of 12-15mt/ha/yr in yr 7-8, and potential peak at 20-25 for yr 9-20.

(iii) Thus, judging from the current FFB price of RM500.00/mt, for a Farm to break even (in other word making an Operational Profit (OP)), a production of 9.00-12.00Mt/ha/yr would be needed and this would only be achieved in year 6-7 after planting. What it means is that, at this age, the Farm is self financing especially to take care of the Maintenance, Harvesting and Transportation Cost ie RM4,500-6,000/ha/yr.

(iv) The year whereby Operation Profit (OP) is made is referred as Profiting Year. But this doesn't mean, a real profit had been made since the Development Cost of RM15,000.00 had not been recovered. Under normal Plantation Development, the recovery (payment) of this RM15,000.00/ha will be spread over 6-7 years after maturity, meaning 9-10 years after the planting years. With such a period of spread (in Financial term: amortize), if there is an element of Borrowing Interest say at 6.5%, thus within that 9-10 years period, definitely, at a compounding rate, the RM15,000.00 would now becaming RM20,000.00.

(v) Based on such scenario, the Farm need to repay at least RM3,300.00/ha/yr for about 6-7 years upon maturity. If this is couple with the cost to Maintain, Harvest and Transport, meaning in the year 7 onward, the Total Cost of the Farm would be RM7,800-9,300/ha/yr. Therefore in order for the Farm to be able to pay off this Cost, it must achieved at least 16-19Mt/ha/yr. This production would only be achieved in year 8 onward.

(vi) Since amortization is made within six years period, there is a high probability that all the cost would only be recovered in year 11-13. Thus, in reality, an Oil Farm would only make a Real Profit after 11-13 years of planting. Nonetheless all are subject to good management, good price, and stable interest rate. If thing change to bad, a Farm would never give a good Profit, a real Profit.

(8) But what is that claim, that say Self-Managed Farm would give faster and better reward? It is in fact right, but not true. Firstly, the reason is simple, and individual farmers who plant on their own, they wouldn't borrow money to develop the Farm. Thus, element of Financial Cost will never arise. Secondly, normally, his labor cost never counted. Thus that save lots of cost. Thirdly, he also never counted his farm inputs cost especially for the fertilizer, weedicide, and related pesticide. Basically, lots of hidden cost never being counted.

(9) When a farmer sold his produce, the sale that he got, to a 'naive' rural farmer, he calculated that as profit: UNTUNG. But is it really an UNTUNG! In Financial term, what he got is in fact Gross Revenue. And surely he can get his Gross Revenue even after 30 months after planting. That is what he means by Faster Return. And since he never deducted even his own salary to produce the crop, therefore, his Revenue is Equal Profit! Is that Right?

(10) I would say that is how our Bumis calculate Profit. In all business they are doing, especially in the rural areas. Please recall the Malay terms: UNTUNG TAK RUGI, UNTUNG BALIK MODAL, UNTUNG MAKAN, UNTUNG TAK MAKAN GAJI, etc! Ask a Chinese, even at a Village Shop, whether they made any money in their business, surely the answer is Mana Ada Untung! But, definitely his salary had been taken care!

(11) Thus, a rural Folk, has misconcieved what is OP, Real Profit and Gross Revenue. Not only them, but those educated but don't really understand the Industry seem to join the Van Wagon into the Fallacy of Fast and Better Return. Worst when the "VIP: Very Indifferent Politician' came into the game!

(12) If it is truely the case, just go deep into the rural areas, find out how much of the smallholder Oil Palm Farms are slowly being abandon or badly managed. What does all these mean? One will find out all these farmers are slowly facing: Labor Shortage, Ever Increasing Farm Inputs Pricing, Unstable Products Pricing, Support Service Issues, etc.

(13) Under current scenrios, a Real Profit (PAT) that could be made from an Oil Palm Farm is about RM2,500-3,500/ha/yr. This is a Net Profit, real clean Profit. That is the truth, that is the fact!


Kuching, Sarawak
26 July, 2010