Where are we in the Palm Oil Cycle? Sold United Plantations.

I've been holding United Plantations (KLSE:2089) and valuations are looking stretched.  At RM3/share, its got a PE of 20 at an ASP of RM 4.2K per tonne.  A 5% yield at a 99% payout ratio.

Should I keep holding?  The key is the price of palm oil.  Can we predict it?

Demand has too many moving parts:

• Economic growth
• Price of substitute oils (eg: rapeseed, sunflower, soybean)
• Biodiesel

Supply is easier.  Palm oil trees produce no fruit for the first two years, then rapidly increase production until they are 5-6 years old:

Source: MP Evans

So a supply response from newly planted trees takes 3-6 years to hit the market.  Usually when a commodity's price skyrockets, people are incentivised to produce more.  But in the short term, prices move higher due to the delay in bring on new production.  The supply response, delayed at first, eventually leads to a glut.  High prices are the cure for high prices.

Have we seen the start of a supply response yet?

The two main suppliers are Indonesia with 2/3rds global production, and Malaysia with 1/3rd:

• Indonesia had a moratorium on new plantation from 2018 to 2021.  Land use grew 2% over that period (p21).  In 2022 it grew 4.9%, in 2023 3.8%.  We don't have 2024's numbers yet.  Palm oil from the 2022 trees should start hitting the market now.  

Source: Indonesian Oil Palm Statistics 2023 (BPS Statistics Indonesia)

• The Indonesian President urged massive expansion of oil palm plantations early this year, but if implemented, the supply from this won't hit for at least another 2 years.

• Malaysia has not planted new trees, but has decreased its palm oil plantation size (down 4% from 2020 to 2024).  Production fell 3% in that period.  Malaysia has decided to focus on sustainability and productivity, instead of plantation size.

So Malaysia has no increase in production, and decreasing plantation size.  Indonesia had a 4.9% increase in plantation size in 2022: oil from those plants should start tricking in to the market this year and increase for the next 4 years.

Conclusion

• There's no obvious massive flood of palm oil coming yet.  But we've seen the start of the supply response.  If Indonesia did ramp up in 2024 and keeps doing so this year, I may be shorting palm oil stocks in a few years time.
• At a PE of 20, too much good news is priced in for United Plantations.  With a 99% payout ratio, its not a compounder, just a cyclical.

Sold my shares in UP at RM 23.10.  Profit was around 160% over 4 and a half years, including dividends.  Its been a good run.

I was thinking of only selling half, as the Palm Oil Bull market may still have some legs.  But decided to sell all as the US market and economy looks shaky.

References:

• Google for "Indonesia Oil Palm Statistics 202X". (eg: 2023)
• Google for "MPOB Overview of Malaysian palm oil industry" (eg: 2023's result)
• Alternative production and land use figures from the US FAS.  You can Select "Indonesia or Malaysia" and Palm Oil".

Portfolio

After the market euphoria of Trump's Election has faded, we are looking at slowing growth and inflation.  I don't know how long for.  I'm rebalancing my portfolio away from commodities and towards towards poor corrupt growing countries EMs.  It depends on what stocks I can find.  Now I'm a quarter in EMs:

I'd consider shorting the US market, but too busy at work to stay up and place trades.  US market hours interfere with my sleep cycle.  Much as I would love to gain experience shorting - I need to make money in all markets - its not worth it now.