As populations around the world in both developed and emerging markets increase, new solutions for both feeding and providing energy for the planets new citizens will have to be fashioned. Recent struggles within the United States corn ethanol industry illustrate that finding the balance between food and fuel source can be difficult. Several producers such as Aventine filed for bankruptcy protection as feed stock costs soared and food demand strengthened. However, a different crop might be the best combination of a renewable energy source and food play.
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The Oil Palm
Palm oil is quickly emerging as the cooking medium of choice for the developing world, with both China and India being the largest importers of the substance. Worldwide demand for vegetable oil is expected to rise nearly 54% by 2020, with palm oil demand nearly doubling in that time frame. (To learn more about the consequences of rising demand, see 22 Ways To Fight Rising Food Prices.)
Its low cost is one of the reasons for its growth. The oil palm is regarded as one of the most cost-effective vegetable oil crops, cultivating average yields of 3.5 to 5.0 tons of oil per hectare per year. This low cost and high production values has the oil competing with soybean imports in Asia. Important festivals with their communal meals in China, India, Pakistan and Indonesia are strengthening edible oils consumption. In Europe, palm oil is quickly becoming a primary substitute for rapeseed and in the U.S., palm oil is finding its way into an ever increasing amount of processed foods.
Cooking aside, the real growth for palm oil could be had as an alternative fuel. Palm oil can be refined into bio-diesel and analysts predict that an oil price above $55 a barrel makes palm oil-based biodiesel a commercially viable option. Currently, only about 20% of palm oil production is used for bio-fuels. Increasing energy costs in developed countries combined with economic growth in Asia's emerging markets are calling for new energy supplies. Increased ownership of cars and motorbikes within emerging Asia will help buoy palm oil prices.
One of the chief concerns related to palm oil production is the vast amount rainforest being clear cut to make way for new plantations. A recently proposed study from the U.K.'s Environment Secretary will look into what proportion was sustainably sourced, and what changes could be made to reduce the impact on the environment. Currently, only 4% of the world's palm oil is certified as sustainable. Investors should beware of any developed countries potential legislation in terms of imports.
Palm Oil Plays
Unfortunately, most pure palm oil plantation stocks, like Sime Darby or IJM Plantations, do not trade on U.S. exchanges. Companies such as conglomerate Jardine Matheson (OTCBB:JMHLY) or Ag-super stars Archer Daniels Midland (NYSE:ADM) and Bunge(NYSE:BG) do have palm oil operations, but are a small part of their overall businesses. Investors wanting to play palm oil's growth, should look to exchange traded funds of the nations chiefly responsible for its production.
Malaysia and Indonesia account for around 90% of the world's supply of palm oil. The iShares MSCI Malaysia Index (NYSE:EWM) is probably the best way to play its continued growth. The ETF has many of its assets dedicated to the palm oil farms and processors, with both Sime Darby and IOI as top-five holdings.
The Malaysia Fund (NYSE:MAY) also gives access, but to a lesser degree. For a play on Indonesian palm oil, the iShares MSCI Indonesia (Nasdaq:EIDO) and its 58 holdings includes more plantation stocks versus the more popular Market Vectors Indonesia ETF (NYSE:IDX).
Colombia has quietly become the largest palm oil producer in the Latin America with significant portion of its crop exported as bio-fuel. The Global X/InterBolsa FTSE Colombia 20 ETF (NYSE:GXG) is currently the only way to access the South American nation.
The Bottom Line
With increasing populations on the horizon, new solutions on how to feed and meet the energy requirements of this larger populace will have to found. The growth of palm oil makes for an interesting trend as both food source and fuel supply. While owning individual plantation stocks in the sector is almost impossible, retail investors can add the iShares Malaysia ETF as starting point for investment.
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