FX policy seen spurring oil palm firms to growth

Foreign exchange restrictions on palm oil imports may be spurring major oil palm producers to growth, as earnings and profit margins swell on the back of favourable pricing and subdued competition from firms that import the agric produce.

Analysts say indigenous firms have enjoyed increased patronage for palm oil from local consumer goods companies which have been hard hit by scarcity of dollars in Africa’s largest economy.

As petrodollars thinned out, the Central Bank of Nigeria (CBN) restricted a list of 41 items, in the month of August 2015, which range from iron rods to wooden doors, from obtaining forex in the Nigerian Foreign Exchange Market, including Palm kernel/Palm oil products and vegetable oils, to ease the pressure on its foreign exchange reserve.

“Eighteen of the 25 products we surveyed, that were subjected to the Central Bank of Nigeria’s (CBN’s) FX restrictions a year ago, continue to exhibit m/m inflation; Prices for 22 of the 25 products rose in y/y terms,” says Razia Khan, managing director, Chief Economist, Africa Global Research, Standard Chatered Bank, in response to questions.

The 2016 half year financial results of Okomu Oil Palm Nigeria Plc showed sales increased by 51.16 percent to N7.54 billion, from N5 billion last year. Net income spiked by 95.12 percent to N3.59 billion.

Net margin, a measure of profitability and efficiency also increased to 47.61 percent in June 2016 from 35 percent as at June 2015.

Presco Plc, a Nigerian palm oil producer, recorded a 60.46 percent jump in sales to N7.51 billion, June 2016 as against N4.68 billion as at June 2015. Net income surged by 152.30 percent to N3.01 billion. Net margins rose to 40.07 percent in 2016 as against 25.42 percent last year.

“We believe that the favourable pricing was mainly due to weaker competition arising from smugglers and more expensive imports,” said Jumoke Okeowo, equity research analyst with FBNQuest Limited, in emailed responses to questions.

“We recall that the CBN banned the sale of forex to palm oil importers last year. In the near term, we expect these supportive trends to still persist; hence impact of prices should remain relatively positive,” said Okeowu.

While firms are thriving on the back of monetary policy, the country is yet to recover and take its position among the comity of producer nations, lagging behind Malaysia and Indonesia-the world’s largest producers of the product.

Although the discovery of oil in commercial quantity caused neglect of the palm industry, experts added that the major challenges facing the industry includes- lack of access to funds, the use of out-dated method of processing, lack of hybrid seedlings for planting and multiple taxation.

“Investment in oil palm requires huge finance. Farmers are not cultivating new farmlands because it requires huge finance. Funding is one of the major challenges we face in the industry,” said Henry Olatujoye, national president, National Palm Produce Association of Nigeria (NPPAN).

“The traditional processing has been very inefficient because of low technology which has contributed to the shortage of palm oil for industries,” he said.

According to a forecast by the Food and Agriculture Organisation (FAO) of the United Nations, global demand for palm oil will double by 2020, and triple by 2050.

Nigerian firms with the largest oil palm farms have resorted to backward integration, as they continue to expand plantations and create jobs.

For instance, Okomu plans to employ 45,000 workers on a N2.5 billion 11,000 hectare located near Benin City, according to its Chief Executive, Graham Heifer.

In addendum, Presco, a company that has been doubling rubber per hour, increased its total land area by 18 percent to 16650ha in 2015, out which 92 percent is mature land.

PZ Wilmar Limited, a bellwether company in the industry has acquired 26,500 hectare of oil palm plantation in Cross River, while planning to set up 50,000 hectares more.

Little wonder analysts at Chapel Hill Denham (CHD) are betting on the major oil palm producers as the allure of the agriculture sector because of their strong margins and government’s ban on imports.

“Apart from the banks, we also like Presco (BUY, TP: N45.32), which sources a substantial part of its raw materials locally and enjoys low borrowing rates via the CBN’s commercial agriculture credit scheme,” said Tajudeen Ibrahim, head of research, at CHD in a recent note.

On the flip side, some analysts say the restriction on the 41 items may be undermining efforts to engender liquidity in the interbank market.

The blacklisted items are triggering substantial trade in the black market, traders say, and a quick fix will be “to upturn the monetary policy and attack them with fiscal policies,” said Tiffany Odugwe, a macro-research analyst at Cardinal Stone Partners, an investment bank, in response to questions.

“We can hike import tariffs significantly on the 41 items to discourage them from coming in, and then open up access to dollars for them, to improve liquidity at the official market,” Odugwe said.

BALA AUGIE & LOLADE AKINMURELE