Financing the Palm Oil Sector
There are over 4 million smallholders cultivating 70% of global Palm oil sector. Financing for palm oil sector remain significantly important to establish, maintain and replant their oil palm plantations, in order to both increase productivity and improve the quality of the fresh fruit bunches. Their capacity to self-finance their plantation is limited. However, most of them are credit-constrained. The late70s, witnessed numbers of credit schemes for oil palm smallholders. Banks and other formal institutions have also been offering various credit schemes in terms of the amount, grace period and requirements for smallholders, both individually or in groups.
Phases of financing Palm oil Sector project
Project management in most cases is carried out from a standard algorithm that is adapted to the conditions of a particular project. In any case, this process includes the initiation phase, planning, engineering support and execution. In the initial stages of a palm oil sector, participants have a very vague idea of the final cost, but with each subsequent stage of planning, financial needs become more precise. At these stages, action plans and decisions are laid that will ensure the financial sustainability of the entire project in the future.
Project initiation and definition phase
Although in the past the palm oil sector could hardly be called innovative or high-tech, today many new investment projects are inextricably linked with the introduction of new technologies that make it possible to successfully exploit hard-to-reach fields. New business opportunities that open up as a result of rising world prices for technical breakthroughs form the basis for the initiation of major projects in this sector.
Project initiation refers to any form of proposal, theoretical substantiation of future investments. Of course, at this stage, the participants do not have a clear idea of the future investment needs, cash flows, funding schedules and payback periods of the project.
This uncertainty is aggravated by the fact that prices for palm oil, palm oil products and plantation are characterized by extreme volatility, being highly dependent on the geopolitical situation and on the phase of the global economic cycle. Therefore, the project will take on a clearer shape in the next phases, when the participants will draw up a certain budget and propose optimal financing models. The definition of an oil and gas project is aimed at gradually narrowing the number of investment options, clarifying the parameters and financial needs of the project.
A critical role at this stage is played by professional engineering services, laying the foundation for choosing the right technology, equipment and technical solutions. During the first phase of project development, participants will have to resolve issues such as the supply of materials, the acquisition of technology, logistics and markets. It is important to correctly distribute the risks between the parties, which is laid down in the contractual structure.
Havelet Finance Limited offers Palm oil plantation project financing and project management services worldwide.
Professional management of Palm oil plantation projects
The tasks of project management teams are extremely variable, ranging from controlling the purchase of equipment to financial tasks. These tasks cover a very wide range of qualifications and spread over wide geographic areas. Coordinating these teams requires managers who have a deep understanding of the oil and gas industry and are able to work in complex, changing environments.
International palm oil projects, which cover several stages from extraction to refining and transportation of Palm oil Produce, often involve tens of thousands of people.
The economic context of palm oil and the role of smallholders
Global demand for palm oil has consistently increased over the past two decades. This increase has been led in part by health concerns from consumers who push manufacturers to replace animal fats high in cholesterol and often high in trans fats with healthier options. Exports from producing countries increased significantly from 600,000 tons in the early 1960s to around 8.5 million tons in the early 1990s. This increase has continued to this day. In 2015, around 46 million tons of palm oil were traded in the global market (USDA n.d.).
Malaysia was the world’s leading exporter of palm oil. Since then, Indonesian palm oil exports have surpassed Malaysia’s. Following the example of its neighbor, Indonesian palm oil production increased massively, with production aimed at both domestic and international markets. From 2005, Indonesia has been the largest producer of palm oil in the world. Over the past five years, the country has contributed over 50% of worldwide palm oil production, accounting for 30.3 million tons annually on average (USDA
Sources of financing for Palm oil plantation projects
A large numbers of financing source for the palm produce are recognized. The most popular of them are disclosed herewith;
Venture Capital: Venture capital is a type of medium-term and long-term equity financing, which is provided by investing outside the public capital market. Therefore, it is intended mainly for small and medium-sized companies that are not listed on the stock exchange and have the potential for rapid growth. Investments mainly include the acquisition of shares in innovative enterprises by an external investor. They are purchased for the purpose of their subsequent resale in 2–5 years, and the return on invested capital and the potential profit of the investor come mainly from the sale of shares. In the context of seeking funding for innovative projects, the source of venture capital can be viewed as an additional shareholder that brings new capital to the project in exchange for additional shares. However, a venture investor is not a typical co-owner of a company.
Business angels: The term business angels refers to individuals who provide equity capital to new, innovative businesses with high growth potential with whom they share industry interests. In fact, these are entrepreneurs who make venture investments using their own funds. Often these are businessmen who have achieved success in a particular industry in the past.
Larger projects need other sources of financing, especially since it is difficult to arrange simultaneous financing of a project by several business angels. Business angel interests usually include companies offering solutions in the field of alternative energy sources, energy efficiency, IT, biotechnology, etc. All these areas are considered attractive in terms of achieving high growth rates and, accordingly, high profits in the short term.
Long-term loans for Palm oil planation projects
A long-term investment loan can serve as a source of financing aimed at the introduction of modern technologies. The amount of a technology loan can amount to several million euros, depending on the specific sector, type of project, its novelty and commercial potential.
The use of long-term loans for financing the palm oil sector is usually strictly limited to the purposes specified in the loan agreement. A technology loan is actually a form of investment loan. It is provided by commercial banks on the same terms and conditions under which a standard investment loan is usually provided by all corporate clients. This requires the applicant, among other things, to demonstrate high creditworthiness and provide full collateral adequate to the amount of the loan.
Interested in long-term lending for innovative projects? Looking for support in commercialization of palm oil plantation projects, kindly contact us.
We are also currently structuring a convertible debt and loan financing and other project financing and international loans at of 2% interest repayable annually with no early prepayment penalties.