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2 Risks For Investors To Note About The Palm Oil Industry

In a recent article, I had looked at some of the strengths of the palm oil industry. They are (1) oil palm plantations’ ability to produce recurring income and (2) the good crop-economics that are found in the oil palm crop.

There are a number of companies in Singapore’s stock market that are either fully or heavily exposed to the palm oil industry and they include, among others, Wilmar International Limited (SGX: F34), Golden Agri-Resources Ltd (SGX: E5H), First Resources Ltd (SGX: EB5), and Indofood Agri Resources Ltd (SGX: 5JS).

In this article, I’d like to look at the other side of the coin and share some risks about the palm oil industry that investors may want to note. They are:

1. Fluctuation in palm oil prices

Crude palm oil is a commodity that is traded on a global scale. And just like most – if not all – commodities, the price of crude palm oil is subjected to market forces and are not really within the control of any crude palm oil producing company.

Thus, the price of crude palm oil will fluctuate according to the market’s perception of factors such as supply and demand, weather conditions, inventory levels, and macro-economic conditions etc.

This is a risk for palm oil producers as the potential fluctuations in crude palm oil prices can lead to variable revenue. If a company has high fixed costs, then profitability can be sharply affected when revenue is lower due to the effects of operating leverage.

2. Exposure to many uncontrollable factors

The palm oil business, like many other crop-based businesses, is exposed to uncontrollable factors such as the weather and the emergence of crop diseases. These are difficult and sometimes impossible to manage. There is thus little an investor can do but to accept those risks if he or she wants to invest in the palm oil industry.

It’s important that investors fully understand the risks and rewards involved with any industry and its companies before any investment is made. What I’ve shared above about the palm oil industry’s risks is not an exhaustive list, but they are still important things for investors to keep in mind.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.