OBG talks to Sabri Ahmad, CEO & Group President, Felda Global Ventures Holding(FGV)

Interview: Sabri Ahmad

What is the explanation for such high investor interest in plantation companies in 2012, and what will be the key value drivers going forward?

SABRI AHMAD: In my view, there are three main reasons. Plantation companies supply commodities for food production. Food is a recession-proof business. We all know that during recessions, people will first sacrifice spending on investments in the house and purchase less discretionary luxury goods, whereas food cannot be easily sacrificed. This makes the whole business model of plantation companies resilient to economic downturns. Second, plantation companies in South-east Asia operate between China and India, two highly populated countries with very large middle-income consumer segments. The oils and fats consumptions of these two countries are relatively low compared to other countries. Thus, there is potential for growth. We anticipate that the demand for oils and fats in these countries will continue to rise. The third fundamental factor is that there are very few new sources of oils and fats. Palm oil is arguably one of the last growth areas in the supply of calories. Today it is the fastest-growing commodity sector, and that protects it against substitution risk.

Given the prominence of palm plantations in the supply of oils and fats, what are Malaysia’s advantages, both globally and in the region?

SABRI: There are only two net exporters of palm oil in the world: Malaysia and Argentina. Malaysia exports around 90% of its palm oil products. Argentina is undergoing a policy review that may limit their exports. Brazil is a big producer, but has a large population to supply. Similarly, Indonesia, which is well known for its large production of palm oil, has a population of more than 250m. The US used to be a major exporter of soybean oil, but is now a net importer. So, the world has less and less export capacity left. In addition, China and India, in my view, will never be self-sufficient in the production of oils and fats. These factors leave Malaysia in a very good position to meet global demand for palm oil.

What are the main comparative advantages of palm oil vis-à-vis alternative sources?

SABRI: Let us not forget that 1 ha of palm plantation will produce 4-5 tonnes of oil, whereas 1 ha of soybean may produce only one-tenth that amount. Thus the amount of land required to produce an equal output of soybean oil is 10 times greater, meaning the adverse impact on the environment is 10 times greater. Of course, one could argue it may not be a fair comparison as soybean is largely used for animal feed with oil being a by-product. But, nonetheless, the fact remains, if you want to manage demand requirement whilst minimising adverse impacts, palm oil is the best solution. Last, but not least, palm oil is about $250 cheaper per tonne compared to soybean oil. In a world with an increasing need for oils and fats, palm oil is an obvious choice to satisfy this ever-growing demand.

Assuming that the demand for palm oil will continue to grow, how much more can Malaysia and other countries offer over the medium term?

SABRI: I think we have to be very clear that in Malaysia, we do not have much more capacity available. We are fully committed to maintaining at least 50% of our land as forest to protect and preserve our environment, much higher than in most developed countries. The government and industry, including FGV, are focused on increasing the productivity of land currently in use. Just 20 years ago, 20 tonnes per ha of effective oil palm yield was considered to be a good result. Today, we are talking about a yield of 30-40 tonnes per ha. Our view is that with good estate management strategies and replanting practices, we can substantially increase our production capacity well beyond today’s output. Right now the average output for the country is around 19.7 tonnes per ha. The average in our group is around 19.8 tonnes. Our target is to increase 1 tonne per ha every year over the next five years to 23 tonnes per ha. This should go a long way in meeting global demand for palm oil over the medium term.