I was in the KSL Mall a couple weeks ago and one of the temporary pop up displays they often have selling real estate (often to be build condos…) or wedding materials or… was for investing in palm plantations. Since it was the middle of the week and no-one was around I talked to the salespeople a bit. I am a pretty skittish investor. I am willing to take investment risks but I want to understand what the risks are. I can’t see myself actually investing in this now, but it was somewhat interesting.
They, Golden Palm Growers Berhad claim a 6% guaranteed rate of return. I asked who guaranteed it and I couldn’t really get an answer I understood. They did seem to agree the guaranty wouldn’t protect against some natural disaster or if palm oil prices feel below a certain level (I think the equivalent of $40 a barrel for oil). They seem to be able to use guaranteed much more liberally than would be allowed in the USA related to investments.
On top of that return there was a “discretionary bonus” that in initial years was based on income earned on excess capital. I still couldn’t really understand the investment totally but it seemed similar to a limited partnership where the company was the general partner (owning the land and managing the care of the palms and selling the palm nuts to processors). I can certainly understand that the general partner may want to take on limited partners. In such situations the general investment market (palm oil) is important but it is also extremely important to trust the competence and reliability of the general partner. Their interest can be somewhat shared with yours but they have an interest in high management fees (to pay themselves) which is exactly counter to all the limited partner investors.
As I understand it, after 6 years the palms should start producing. The scheme is for 23 years (I think palms have a productive life span of about 17 years, so 17 + 6 = 23). During the productive years investors enjoy 100% of net profits with a minimum return of 9% expected, if crude palm oil exceeds RM 1,500 per metric tonne (today close to $US 500) and I believe equivalent to $40 a barrel for crude oil. It looks like the price might be at about RM 2,500 today (but I am not clear if this is
Those returns are certainly reasonable and seem realistic. The investment is transferable though my guess is the secondary market is not very active (so getting out could be a matter of finding someone you know to buy you out or taking a big loss). This also points to a possible investment opportunity offering to buy out those in similar schemes that want out (if they have to sell at below market rates to find a buyer that gives you room for extra profit).
If I read the material correctly some government agency granted a concession to the company to manage an oil palm plantation. What that means, practically, I am not sure. It is also approved under the “companies act of 1965.” Again I don’t know what that means, practically. I also don’t understand what percentage of the palm oil sales price is directly comparable to crude oil. The questions is essentially what percentage of refined product is crude oil equivalents (so if crude oil doubles in price can palm oil double or is it less direct than that).
There is a potential to have gains at the end of the period if the value of the real estate has increased.
I would imagine there are many other such schemes (though I am only guessing about that). The thing that most confuses me is the guaranteed return up front. It seems to require a bunch of extra capital up front to have payouts when no profits are coming in. Also I still don’t understand how exactly it is guaranteed. Developing and expanding the palm oil market is one of the focuses of the federal government.
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