Palm oil has become one of the most important vegetable oils for entire world community, as it is widely used in various food, cosmetic, and healthcare products and it can be used as a source for biofuels or biodiesel.
Until 2017, the top ranking global palm oil producer is Indonesia with a production capacity of 31 million tons, followed by Malaysia (17.7 million tons), Thailand (2.1 million tons), Colombia (1.2 million tons), and Nigeria (970 thousand tons), while other countries contributed 4.7 million tons. Thus, the overall market share of world palm oil production is dominated by Indonesia with 64 percent.
The export destinations of Indonesia’s palm oil are India (7.6 million tons) followed by China (3.1 million tons), Egypt (2.3 million tons), Pakistan (2.2 million tons), United Arab Emirates 2.1 million tons), Spain (1.4 million tons), the Netherlands (1.3 million tons), the United States (1.2 million tons), Bangladesh (1.2 million tons), and Italy (1.1 million). Although the numbers are not significant, Indonesia also exports to several Latin American, North American, and Eastern European countries with a total quantity of 7.5 million tons.
Increasing the quantity of production and export of palm oil in 2017 is a good thing for Indonesia, after a sharp decline in the previous year. Palm oil prices rebounded by 26% and provided foreign exchange of USD 22.9 billion to Indonesia economy. Nevertheless, amidst the volatile price of palm oil, the palm oil business from Indonesia will remain profitable for several reasons, including (1) Profit margins in the palm oil business, (2) International demand increase, (3) The cost of producing palm oil in Indonesia is the lowest in the world, and (4) The higher level of palm oil productivity per hectare compared to other vegetable oils.
Palm Oil Business Models
In running the palm oil business there are several models that are commonly known in international trade, namely brokerage model and trading model.
The first model (broker) does not involve the purchase of commodities because your role is purely an intermediary. As a broker you need to build expertise that aims to optimize transactions for the sake of satisfaction of both parties (seller and buyer).
While it does not generate huge profits, it will still generate profits with the smallest risk. In addition, the required capital is relatively small. This model also does not require its own storage because the palm oil is directly sent to the end user. In this business model, you are paid on commission according to the contract agreement.
The disadvantage of this model is that if a sudden price change occurs, the broker will be badly hit by the sharp decline in commodity prices. Conversely, if there is a sudden spike in prices then the broker will get additional profit.
The second model is trading. This model involves purchasing a large quantity of commodities, adding some margin, and selling directly to the buyer. As a trader you need to work exclusively for the supplier’s interest in order to seize market share long term. Your trading team should specifically dedicate their time and experience to ensuring the development of the business.
The trading model business will bring greater and more stable profit, but the capital required is large. In addition, you need an adequate place to store goods or products. This business model has a high risk because you must ensure that the goods are stored properly and are not damaged.
Choosing the Right Business Model
From both models above, you should choose the right business model according to the conditions in your local area. You need to negotiate deals on behalf of sellers and buyers and issue contracts establishing those deals. You should strive to provide the highest level of service and contractual protection to sellers and buyers. You must build through time and relationship the quality system to enable continuous improvement to achieve your customers’ expectations.
After selecting the right business model, the next step is to find the source of palm oil production, in which case it is necessary to undertake the following steps (1) cooperate with a trusted supplier, (2) establish an easily accessible loading port at reasonable cost, and (3) specify transport shipping arrangements.
eKomoditi Solutions Indonesia (eKSI) has a platform targeted at handling the business of oil palm commodities. You simply create a MOU with us, then we’ll direct you to which commodities specification you want, including from which port you should load. We will also direct you to which transporter is available.
Currently, we partner with local, international, and multinational companies to help them optimize inventory and information flow to reduce costs and improve service levels for any commodity in Indonesia. We will guide you for the best shipping route allowed to your country.
In 2018 eKomoditi Solutions Indonesia (eKSI) helped supply a variety of companies, including a rubber plantation in West Kalimantan, with palm kernel shell. Please contact us to see how we can help your company with their commodity needs.