Equity Analysis /

Wilmar and Olam set to benefit from surging food prices

  • Food prices are surging as the world feels the impact of the Russia-Ukraine war and food commodity traders could benefit

  • Wilmar and Olam stocks both rose during the 2006-10 food price spike and could rally again

  • Olam pays a 4.6% yield and Wilmar 3.5%, which is excellent for companies on the verge of growth

Wilmar and Olam set to benefit from surging food prices
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Tellimer Research
3 March 2022
Published byTellimer Research

Ukraine and Russia are leading suppliers of corn, wheat and soybeans – the conflict means the prices of these commodities are likely to rise rapidly. Black Sea ports have been blockaded and the sanctions imposed on Russia will worsen the dislocation.

A raft of other commodities including Asian staples such as rice and lentils are likely to spike, too, given the supply disruption.

The S&P GSCI Agriculture Index (an excellent proxy for food prices, which includes wheat, corn, rice and barley) is already up 22% YTD, and we expect it to rise still further.

Stocks to watch

We see two Singapore-listed commodity traders as potential beneficiaries of the food price spike: Wilmar and Olam.

  • Wilmar is the world's biggest palm oil trader and one of the largest agricultural suppliers overall, with an interest in soybeans and sugar, too. Food shortages globally could improve Wilmar’s gross margins. 

  • Olam is a major food supplier operating in over 50 African and Asian countries. It sources spices, lentils, chocolate and cashews for other multinational firms.

Investors should consider these stocks for the following five reasons:

1. Higher commodity prices are positive for commodity traders such as Olam and Wilmar, which collect margins from the difference between the sell and buy prices of a commodity.

2. Olam's performance closely tracks the steeply rising S&P GSCI Agriculture Index – the correlation coefficient is 73% in the past 15 years.

Relative Performance: Olam vs S&P GSCI Agriculture Index

3. Similarly, Wilmar's stock price has tracked the palm oil price over the past 15 years. Palm oil has spiked to an all-time high on the back of the Ukraine crisis and Wilmar's stock price could therefore rally.

Relative Performance: Wilmar vs Palm Oil Price

4. The past eight years have been difficult for commodity traders. The S&P GSCI Agriculture Index fell 57% from March 2014 to July 2020 and the operating margins of Wilmar and Olam have fallen by a similar degree. The spike in food prices including palm oil and soybean oil is likely to boost the margins of these two players and we expect their stock prices are likely to rally as a result.

5. Wilmar and Olam are underleveraged, cash-generative and generate high dividends. The food price spike could be a springboard for them.

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