You might be wondering what palm oil actually is. Well it’s a kind of fatty vegetable oil, that’s produced by the oil palm tree. The oil palm tree is abundant on the coastal areas of Africa and can grow up to 20 meters high.
For commercial use, palm oil plants are generally grown in a nursery for around 1 – 1.5 years. They’re then transferred to fields, where they begin to produce fruit. The adult trees produce around 10 to 15 bunches a year. Each plantation can therefore yield around four tons of palm oil per year from the processed fruit.
Once the palm oil is extracted from the fruit, it’s refined, bleached and deodorized, then split chemically into palm olein and palm stearin. This makes the oil much more sale-able and enables the grower to receive a much higher price.
Why Trade Palm Oil?
Palm oil has several features that make it attractive to investors. First of all it’s a very stable substance, even in relatively extreme temperatures, so it’s perfect for food production; often it’s used for frying food.
Palm oil prices and attributes also mean it’s a good substitute for the more expensive cocoa butter. And finally it’s the worlds most exported vegetable oil, with around 80% of palm oil worldwide exported to the developed world. This world wide trade obviously makes trading palm oil futures a potentially lucrative undertaking.
Where are Palm Oil Futures Traded?
Palm oil futures are traded first and foremost on the Bursa Malaysian Derivatives exchange (BMD) under the contract codes FCPO (Crude Palm Oil Futures), FUPO (USD Crude Palm Oil Futures) and FPKO (Crude Palm Kernel Oil Futures). They’re also traded on other exchanges, for instance the Multi Commodity Exchange of India (MCX) where it is traded on the futures market under the ticker symbol of CPO.
Palm Oil Trading
Naturally the main consumer for palm oil is the food processing industry, with the palm oil trade forming an essential part of the operations of many large foodstuff producing corporations. China is the largest importer of palm oil, importing around 4 and a half million tonnes each year. The European Union trails only slightly behind this, with almost 4 millions tonnes imported per year.
Palm oil’s high level of availability and its low price, make it a significant player in the edible vegetable oil market. It’s the most abundant and therefore cheapest commercial vegetable oil available and is also the cheapest of the oils to refine and produce.
Palm oil also has many industrial uses, palm oil biodiesel, produced from refined palm oil, is a viable substitute to diesel created from crude oil. This is not without controversy however, as many farmers are replacing traditional food stocks in the developing world with more lucrative palm oil, thus creating a shortage of food in countries that can ill afford it. In some cases large areas of rain forest have been destroyed and replaced with palm oil crops.
Palm Oil Prices
If you’re looking to trade palm oil you need to be aware that prices can fluctuate, just like any other kind of commodity, so it’s important to pay attention to as many of the following factors as possible.
The price and demand of competing vegetable oils can obviously affect the price of palm oil futures, and the spot price of palm oil can be affected by changes in the weather, which always has a bearing the price of agricultural commodities.
The import policies and laws of various countries where palm oil production takes place can also change periodically, and this too can affect the price of palm oil futures. Since this is not a wildly speculative market, information is not readily available.
For instance you’ll have to find out who the major palm oil producing countries in the world are and monitor weather patterns. This is not the kind of information you’ll find on CNBC until it’s much too late and the information has already been priced into the market.
Because of this it can be a very lucrative market if you’re prepared to put the work in. Getting weather patterns from around the world is not as difficult as it used to be after all. If you want to try trading palm oil futures sign-up for an account with optionsXpress and carry out a few test trades using your virtual account. That way you’ll get a good feel for whether palm oil trading is for you, before risking any real capital.