How to ensure you are realistic when analysing plantation companies

[i4value]

I do a lot of fundamental analysis and to ensure that I am not carried away by optimistic or even pessimistic thinking, I follow Daniel Kahneman’s inside and outside view, from his book “Thinking Fast and Slow”

The inside view generally refers to a conclusion reached using an individual own experience and reasoning.  It is the perspective of someone looking at the problem from “the inside”.  The focus is on the specific situation rather than looking at a broader class of similar situations.

In contrast, the outside view refers to the perspective of someone looking at the problem "from the outside". It is the view taking into consideration the actual experience of other people.

When you analyze a company, the inside view may lead to unrealistic expectations. To counter this, you need an outside view.

This is where base rates come in. The performance of the industry would give you a basis to check on your analysis and projections.

I have updated my base rates for the Bursa plantation sector as per my article “How the Malaysian plantation sector performed over the past 10 years”

[weijian]

hi i4value,

The whole palm oil as bio diesel thing started off with George Bush signing it off into law to get ethanol 10% into their fuel, right towards the end of his tenure. While Bush's main goal was to help their own corn industry, as usual, the whole world followed US standards. A couple of years ago, the EU signed off their own law to ban "unsustainable" bio fuels sources (eg. oil palm which causes deforestation) and most people believe it was just their way to protect their own rapeseed industry as well.

Regardless of how efficient palm oil is touted as a bio fuel, the protective behavior of the biggest US/EU markets towards their own agri industries will not change. With China probably going to be the 1st EV nation, palm oil is left with India as their biggest market.

With this bio fuel tailwind taken off, will palm oil still have a bright future?

[i4value]

The palm oil industry was already flourishing long before bio fuels. I think bio fuel will not be a big ticket given the EV. But is this a sunset sector? I have not seen any signs. Will it be a growth sector? I doubt it. I would treat it as a mature one and it is all about efficiencies and playing the sustainable game.

[weijian]

The palm oil industry was already flourishing long  before bio fuels. I think bio fuel will not be a big ticket given the EV. But is this a sunset sector? I have not seen any signs. Will it be a growth sector? I doubt it. I would treat it as a mature one and it is all about efficiencies and playing the sustainable game.

It really depends on your definition of "flourishing". For sure, I have been seeing a lot of palm oil plantations along msian highways for a long long time.

What I was trying to say is that historically, big palm oil moves are in response with crude oil prices, due to its substitutability as a biofuel (put into law by George Bush).

[i4value]

It is a commodity and if you could predict the movement of palm oil prices, you could forecast the profits of the plantation companies. Of course, this applies to all commodity companies eg oil & gas, steel. I have long given up trying to forecast the price movements of commodities. Instead I focus on the cyclical nature and go in at the bottom of the performance cycle.

[weijian]

It is a commodity and if you could predict the movement of palm oil prices, you could forecast the profits of the plantation companies. Of course, this applies to all commodity companies eg oil & gas, steel. I have long given up trying to forecast the price movements of commodities. Instead I focus on the cyclical nature and go in at the bottom of the performance cycle.

hi i4value,
When we focus on the cycle, doesn't it mean that we need to "forecast" the commodity price movements?

I have the same thoughts as you - ie. I can't forecast commodity prices. Therefore I try to look at the supply side of capital cycle. But after some time of studying it, I realized that simply looking at the supply side of the capital cycle only allows me to understand what the future beholds. There is little clue to when the over/undersupply happens and hence capitalizing on it (ahead of the market) to make a decent profit.

Commodity bull markets can range from a few years to multi decades (depending on how long new production gets established). But because demand growth is not as scalable as the availability of capital for new production, bear markets are assuredly much longer than bull markets. So without even attempting to forecast, it reminds me of a single legged man entering an ass-kicking contest.

Sometimes, getting trapped in a multi-decade long commodity bear market is worst off than been stuck in a value trap!

[i4value]

I guess that if you are going to invest in cyclical companies, then you must be prepared to hold for 8 to 10 years. I focus on cyclical companies because the "repeated patterns" give my greater confidence when estimating the future. The future = the past with maybe some growth. My approach is to estimate the intrinsic value over the cycle and buy when the market price is lower than this intrinsic value. I sell when it goes above. I have made repeated profits from the same company.