A short note on FELDA

Last week, Rafizi Ramli released the financial statements for Lembaga Kemajuan Tanah Persekutuan (FELDA) for just two years 2013 and 2014 and shouted that FELDA made a big loss of RM1.9 billion in 2013 and another RM1 billion loss in 2014 - which he then suggested is evidence that FELDA will soon go bankrupt.

What about the years 2012 and 2011? Why only 2013 and 2014.

Here it is:

Unsurprisingly, Rafiz did not reveal the statements for 2011 and 2012 - where FELDA made a small profit in 2011 but a massive RM5.7 billion profit in 2012.  

Very sneaky of Rafizi. Big losses he reports but even bigger profits, he keeps quiet.

This big profit is due to the listing of FGV, where FELDA received quite a lot of cash and also recognized the Land Lease Agreement (LLA) of RM5 billion.

This 99-year LLA gives FGV to lease Felda land from FELDA starting from 2012 when FGV listed.

Under the LLA, a hefty payment of about RM250mil per year has to be paid to Felda, which FGV has been paying on a quarterly basis.

In addition, FGV is required to pay 15% profit sharing out of its plantation profits to Felda.

This means that whether FGV makes profit or losses OVERALL, FELDA gets paid a lot of money every year - at least RM250mil per year plus 15% of operational profits.

You would also notice that FELDA's revenues have gone up from RM106 million in 2012 to RM420 million in 2014 - this is due to those LLA payments.

The LLA is a strange arrangement that penalizes FGV and benefits FELDA when palm oil prices increases or production increases as FGV has to increase this LLA liability when this happens - which drags down earnings.

FGV must be the only business in Malaysia that gets penalized when the selling price of their product increases or when their production increases.

To be sure, FGV has been operationally profitable every single quarter. It is only after taking into account this LLA and other one-off write that FGV has reported a loss for some quarters.

The LLA liability is an accounting charge that moves up and down and can significantly affect FGV's reported results.

For example, in FGV's Q4 2014 result, “, without the LLA effect, FGV’s plantation profits would have been doubled for the third quarter under review,”

This gives a misleading view of FGV's yearly results - hence FGV wants to re-structure and re-negotiate this LLA:

The LLA is an unique agreement that goes up and down depending on various factors including price of Crude Palm Oil (CPO).

Here is a short video which explains how the LLA works:

When CPO prices goes down, FGV reduces the LLA liability to FELDA which means FGV owes FELDA less money.

Since 2013 and 2014 were years when the CPO price dropped, the liability from FGV to FELDA was reduced these two years - hence causing FELDA to also recognize substantial losses in 2013 and 2014.

The other thing you would notice is that FELDA's losses in 2013 and 2014 was also due to big payments for replanting and also for settlers welfare - including housing.

FELDA, being a govt statuary body uses a modified cash basis accounting standard - as opposed to a pure accrual accounting as most private or listed company practices.

This means that FELDA's accounts treat replanting payments as an expense for the year - and hence a loss.

A private company would treat this replanting payments as an investment instead of expense (or loss) which increases the "Biological Asset" in their balance sheet. 

A legacy problem that needed urgent correction  

Historical statistics released by the USA indicate that Malaysian palm oil yields have typically appreciated over time, with the strongest period of growth occurring between 1998-2008 when yields increased by approximately 4%annually. 

Malaysian Palm Oil yield started to drop 

As you see in the graph, in 2009 an unexpected break in the long-term national growth pattern occurred where palm oil yields started dropping.

Oil palm is a perennial crop, with trees potentially producing economically viable volumes of fresh fruit bunches (FFB) over a lifespan of 30 years or so. Peak crop yields are achieved from the age of 9-18, and gradually decline thereafter.

In 2009, it was estimated that 65% of Malaysia’s total oil palm area was between the ages of 9-28+, while 26% was at least 20-28+ years old.

Due to neglect from a past prime minister more interested in monolith monuments and building cars, FELDA's problem was worse than the industry - with more than 50% of their palm oil trees then older than 21 years old. 

Age profile of FGV's palm oil trees.

This means that more than 50% of trees would no longer be economically viable 9 years later by the year 2018 - potentially affecting the livelihoods of hundreds of thousands of people.

So, if you were a responsible Prime Minister and the price of palm oil was high then, what would you do?

You would raise as much money as you can - by listing a part of the company to raise funds or borrow when the price of palm oil is highest.

This would be used to fund a massive and costly re-planting exercise and also acquire younger plantations for Felda in order to reduce the overall age profile of your plantations.

You will also use new high yielding planting materials to boost oil yields which are capable of doubling oil yields.

Just like harm was done due to neglect of replanting by a previous Prime Minister that will be known a decade later when the trees die, good that is done by a current Prime Minister will only be known later when the new plants start producing fruit bunches in year 9.

You suffer a bit now so your future is secure rather than have no future if the previous trend persisted.

Facts , figures and history don't lie.

See for yourself how fast the age profile of trees for FGV has come down since 2012.
I had also previously shared that due to past neglect, a big percentage of FELDA's trees were old and would soon be no longer economical as they would produce less oil.

Certainly due to legacy issued and history, FELDA's problems are big and management could be better but FELDA is making positive steps to resolve this.

However, I am confident that the government knows what they are doing and will address these problems - which will place FELDA and its settlers on an even stronger footing for the future.