3 Things Investors Should Know About The Palm Oil Industry From Golden Agri-Resources Ltd’s Annual Report

Golden Agri-Resources Ltd  (SGX: E5H) had released its 2015 annual report just this morning.

Given that the company is one of the leading palm oil producers in the world with 485,600 hectares of oil palm plantations in Indonesia (for perspective, Singapore’s land area is currently under 80,000 hectares!), its annual report can provide valuable information on the status and prospects of the palm oil industry as a whole.

After reading through the company’s annual report, here are three things I learnt about the palm oil industry that I think investors should know.

Factors affecting palm oil prices

In the Chairman’s Statement section in the annual report, Franky Widjaja, Golden Agri-Resources’ chairman and chief executive, shared some information about what can affect the price of palm oil.

For one, there’s a relationship between the price of soybean and the price of palm oil. Soybean and palm are alternatives,  so their prices tend to correlate. As Widjaja wrote, “We started [2015] with crude palm oil (“CPO”) prices under pressure due to plunging crude oil prices and another bumper harvest of soybean.”

Mother Nature is another strong influencer of the price of palm oil. In a period with a severe El Niño weather phenomenon, the price of palm oil could increase due to expected lower production (oil palm trees require a large amount of water to grow). In fact, it was the El Niño weather phenomenon which had partly caused palm oil prices to rise in the latter half of 2015, as stated by Widjaja.

Lastly, government policy also plays a big part in determining the price of palm oil. In 2015, palm oil prices were given a boost when the Indonesia government reinforced its biodiesel mandate through a crude palm oil levy.

Palm oil is becoming the main vegetable oil of the world

Palm oil is currently – and should continue to be – the most consumed vegetable oil in the world. Golden Agri-Resources expects food-related demand for palm oil to grow in line with both population and per capita income growth in developing countries around the world.

Meanwhile, palm oil has overtaken soybean oil as the main feedstock for biodiesel with a 30% share. With the support of the Indonesia government from the biodiesel mandate, non-food demand for palm oil may continue to grow as well.

No one company controls palm oil prices

Golden Agri-Resources is one of the largest oil palm plantation owners in the world. But despite having plantations the size of around six Singapores, the company is still small in the overall picture. According to a report by Oil World, palm oil plantations took up roughly 14 million hectares of land in 2012.

Given the fragmented nature of palm oil production, this means that no one company in the world can truly control the price of the commodity. In fact, most if not all palm oil producers are just price-takers in the market.

And when you are a price-taker, there is very little you can do to improve the condition of your business if and when the price of your commodity does not act in your favour. This was evident in 2015 when Golden Agri-Resources suffered a net loss  – the company’s first since 2001, according to data from S&P Global Market Intelligence – given the poor market conditions in the palm oil industry.

Foolish Summary

An annual report can contain plenty of valuable insight. When you read through an annual report, you could even find out interesting and useful information about an industry as well. As we’ve seen above, Golden Agri-Resources’s annual report is a valuable resource for anyone interested in the dynamics of the palm oil industry.

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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 doesn't own shares in any companies mentioned.