Understanding The Oil Palm Business

Given that there are close to ten companies listed in Singapore which are involved with the oil palm industry – examples include Bumitama Agri Ltd (SGX: P8Z)First Resources Ltd (SGX: EB5)Golden Agri-Resources Ltd  (SGX: E5H) and Indofood Agri Resources Ltd (SGX: 5JS) – it might be worth our time to understand the oil palm business better.

This brings me to an experience I once had. My history with the investment industry has been quite unconventional. Once upon a time before I became a Fool, I was actually a fertilizer salesman.

As oil palm is a major crop in the region, I had travelled around Malaysia, Indonesia, and Thailand, trying to sell fertilizers to the operators of the oil palm plantations.

On one of my travels, I actually visited a really interesting oil palm plantation that ingrained in me the thought that the plantation manager has a big role to play in the productivity of the plantation.

Not all palm oil companies are created equal

As investors, it’s easy to assume that good practices in the management of an oil palm plantation include spending more on building roads (to allow for easy access), using high-grade fertilizers (for good growth in the trees), and applying high-end pesticides to prevent weeds from choking the growth of the oil palm trees.

But that interesting plantation I visited upended all that.

In a stroke of creative genius, the manager decided to raise a herd of cattle numbering more than 200 within the plantation.

The idea is that the cattle can be used to pull carts when the workers were harvesting the oil palm fruits. Using cattle as compared to tractors would mean that the plantation need not construct as many wide roads as cattle’s more mobile in the plantation environment than tractors.

Moreover, the cattle was feeding on the weeds in the plantation, thus helping maintain a clean and weed-free environment. The cow manure produced also became natural organic fertilizer for the oil palm trees.

To top all that off, the cattle could even be sold for a profit when they reach their prime age.

The decision to use cattle to fulfil so many different purposes (transport, weed-maintenance, and fertilization) is one of the most ingenious ideas I have come across in the plantation business. The manager was able to transform issues that would require huge expenses to solve into a potential profit-making opportunity.

Foolish Summary

This little experience I had showed me that when we’re analysing a company, understanding management’s philosophy and methods in running the business can be as important as understanding the firm’s financial figures.

As seen with that unique plantation, there are many ways a company can be much better managed than its competitors even if it’s in a commodity business without much pricing power.

It’s thus important to keep in mind that not all palm oil companies are created equal.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns First Resources Ltd.