Business Times - 02 Dec 2011

Olam to set up US$49m rice farming and milling

facility

The facility, located in Nigeria, will see operations commence in 2012

By FELDA CHAY

OLAM International is investing US$49.2 million in its first rice farming and milling facility, which it said

will be located in Nigeria and will deliver an internal rate of return (IRR) of 28 per cent.

One analyst noted that the IRR is high, but said the project also carries high risks.

'There is no free lunch,' said OCBC Investment Research's Carey Wong. 'Agriculture is subject to

issues such as pests (wiping out crops), diseases and bad weather. There are also political risks in

Nigeria.'

Olam said in a statement yesterday that it will start rice planting during the April-June period, its last

quarter for FY2012.

The facility will begin to generate revenue in FY2013, and will be fully operational by FY2016.

The 6,000 hectare farm in Nasarawa, one of Nigeria's main rice growing belts, is expected to yield

36,000 tonnes of milled rice annually at its peak, and will be sold through Olam's distributors and

dealers across Nigeria, where it already has a presence.

UOB-Kay Hian analyst Eugene Ng said that the farm will likely raise profit margins for Olam's rice

operations, but that it is likely to be a 'very tiny' increase.

The company currently works with several rice farms, but does not own any of them. It is among the

largest rice traders globally.

The company's investment in rice farming in Nigeria comes at a time when the government has

pledged to raise rice production in the country - said to be among the world's largest consumers of

rice.

Nigeria consumes about 5.5 million tonnes of the commodity each year, of which 1.9 million tonnes

are imported.

'Globally, land under rice cultivation has remained stagnant around 150 million ha over the last 30

years,' said Rajeev Raina, president of Olam's rice business. 'With the growth in population not being

accompanied by an increase in the area under cultivation, we have seen a lot of pressure in respect

of global rice supplies with growing countries either banning exports altogether or increasing the

support prices of farmers, thereby increasing the selling price of milled rice in the international

market.'

Mr Raina added that Olam's investment in rice farming and processing in select markets, while

helping the importing countries in their import substitution efforts, 'would also help us to selectively get

integrated in the value-chain by participating in attractive and higher margin profit pools upstream in

rice farming'.

Olam said that it would fund its investment through a combination of internal accruals and borrowings.

Last month, the group announced a 15.1 per cent year-on-year jump in first-quarter net profit, with an

overall rise in sales volumes helping to lessen the impact of lower net contribution from its cotton