KUALA LUMPUR (June 19): Amid its ongoing transformation programmes to turn to profit, FGV Holdings Bhd’s performance remains susceptible to crude palm oil (CPO) price swings, although this is not the case with most other oil palm groups.

FGV chairman Datuk Wira Azhar Abdul Hamid affirmed this, when elaborating on the group’s ongoing ventures into other agro-food business such as dairy and cash crop.

One challenge for FGV in shaking off its exposure to CPO price fluctuation is the ongoing land lease agreement (LLA) with parent Felda, for the lease of 355,000ha at a price of RM248 million per annum plus 15% profit share.

“Without elaborating too much, I think managing the LLA has always been challenging for FGV,” said Azhar.

“As you all know we have fixed costs (of RM248 million) and variable costs (of 15% profit) for the LLA, which I am very happy to say we have never failed in our obligations [to Felda].

“But you can imagine, we are exposed. Of course we don’t control CPO prices. Should CPO prices decline, that challenge will be greater for FGV.

“To manage the LLA situation as far as FGV is concerned, we are trying to sort of broaden our base so that the impact of LLA can be lessened.

“That is why we are now focused on agri-crops and other downstream businesses so we have better control of our financial numbers,” Azhar said.

For the record, the LLA was inked between FGV and Felda when the CPO price was still hovering above RM2,800 per tonne. It last hit that level in 2017, and has trended downwards and now stands at RM2,400.

In the first quarter, FGV’s CPO cost before LLA stood at RM2,177 per tonne. The group aims to hit an annual average of RM1,500-RM1,600 per tonne this year.

As it stands, the deal is not win-win for Felda and FGV as the returns to Felda is below estimate, while FGV pays the fixed cost even if it makes a loss.

On the other hand, a cancellation of LLA will cost Felda a high compensation fee, and it takes high capital to manage the lands. For FGV, a termination will remove 80% of its total landbank currently measuring 439,725ha.

Azhar however did not comment when asked whether there is any ongoing negotiation on the LLA terms between the two parties.

In 2019, FGV processed 2.94 million tonnes of CPO, of which only a quarter was refined further downstream.

In its agro-food expansion drive, the group has ventured into the dairy farm business, having brought in 122 cows and introduced the “Bright Cow” brand for its dairy products under the subsidiary FGV Dairy Farm Sdn Bhd.

FGV DairyFarm can process 800 tonnes of fresh milk per month.

The group together with 51%-owned MSM Malaysia Holdings Bhd is also speeding up its RM100 million agro food valley across 4,400ha of land in Perlis, to be completed within two years.

“These [ventures] will take time,” said Azhar. “If there are opportunities to acquire ready companies, we are happy to participate but sometimes businesses like this need to be developed,” he added. 

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