Profiting From Palm Oil

Has any one seen this?
Does money grow on trees?
Investment | Commodities

By Justin Modray, published 18 August 2010.
Helpful? 61

Are schemes that encourage you to buy trees that produce biofuel a great investment opportunity or rip-off?

There’s no doubt that alternative sources of energy will become increasingly big business over the next 100 years.

If we accept that fossil fuels will one day run dry and that universal adoption of nuclear energy is not a reality then it seems pretty obvious that other energy sources such as fuel derived from crops (biofuel), solar and wind energy will need to plug the shortfall between demand and supply.

So, on the surface, there should be some good long term investment opportunities if you choose carefully.

I’ve been getting a few emails recently encouraging me to invest in so-called ‘green oil’ and ‘miracle trees’ with the prospect of astounding returns. My initial reaction to such emails is always ‘scam’ followed by a quick tap on the delete button. But I thought I’d take a closer look at a couple of examples to see whether they really are too good to be true.

Moringa – the miracle tree
This email, from Taylor Langton Associates, projects a 517.81% return over five years by investing in Moringa Trees – described as a ‘miracle crop’.

I downloaded a brochure and while it’s more pre-occupied with pretty pictures and selling the story rather than useful investment information, I managed to glean the following:

Taylor Langton Associates is an agent for Insight Group PLC, an African based company whose chairman, Alfonso Revilla, is a lawyer currently studying to become a litigator. You invest $US 1,500 per hectare via Insight Group to buy farm land in Mozambique, Africa (plus unspecified legal costs). You then pay a one-off fee of $970 per hectare to plant your crop and 18 months later a fee of $530 per hectare to harvest and sell your first crop (the seeds, which are primarily used for biofuel) at an estimated price of $690 per hectare. No information on how the 517.81% projected return is calculated.

well i can tell you at 25% yield 690x4=$2740. Edible green oil is trading at only $1200! - either its 50% or a scam.

The Green Oil Programme
This scheme, offered via Graham Stuart & Associates, invests in Jatropha trees (currently in Cambodia and Thailand), again with a view to selling the seeds for biofuel production.

You buy trees at £1.25 each (minimum £3,125 investment) and then receive 60% of your tree’s annual revenue for the first 10 years followed by 30% of its revenue thereafter, with an expected tree life of 35 years. Projected returns are quoted as 9.8% in year 1, 19.7% in year 2, 29.5% in years 3-10 and 14.8% a year thereafter. The figures are based on a yield of 1.5 litre of oil per tree per year but other assumptions, such as oil price, are not detailed – a major omission.

The proposition has simplicity in its favour; all fees are incorporated within the percentage of revenue you receive, but I’d still view it as very high risk with far too little information provided to make a sensible investment decision.
Conclusion

Whenever you’re presented with an investment that looks too good to be true, always ask yourself "why is the salesman/company selling this to me rather than investing their life’s savings and borrowing heavily to invest themselves?" After all, if it’s that good why bother sharing the opportunity with anyone else?

The answer’s simple – it’s either a scam or there’s more risk involved than the salesman would like to admit.

My biggest concern with these investments is that you’re investing in trees you’ll probably never see in person via companies you’ve never heard of. It involves a lot of trust and if things go wrong you’ll have no protection as the investments are not authorised or regulated by the Financial Services Authority - you’re on your own. If these schemes turn out to be less than genuine, or simply go wrong, I wouldn’t fancy your chances or getting any money back.

I’ve little doubt about the potential for biofuels (and farming in general) longer term, but buying your own trees in a developing country is an incredibly high risk way to bet on this. Even assuming an investment is genuine there’s a lot that could go wrong. The countries concerned may have political risk and/or a less than robust land ownership system. What happens if a foreign government or locals decide to claim your land? Bad weather/disease wipes out your crop? Or the investment/management company goes bust?

And as for selling on your trees if you need your cash back – good luck!

The price of biofuel is determined by the price of oil (it’s basically a substitute), so your investment return will depend heavily on oil prices. While likely to rise longer term they may continue to be erratic shorter term, further adding to investment risk.

If you want to invest in biofuels and other sources of alternative energy then probably more sensible (and safer) to do so via investment funds run by well established, reputable, companies – e.g. the Blackrock New Energy Investment Trust. But remember that even these funds are still pretty high risk and could lose your hard earned money, so tread very carefully.