5 Fundamental Factors That Will Affect Futures Crude Palm Oil Trading

By Evelyn Yong | 19 July 2018

Due to the high liquidity and low cost of trading, a lot of investors will opt to trade in derivatives market especially Futures Crude Palm Oil. FCPO is one of the popular derivatives traded in Bursa Malaysia market, and most of the traders are focusing on technical analysis and market news or arbitraging. However, the fundamental part should not be neglect as it can be a decisive factor to determine the market trend as well.

  1. Weather Season
  2. The Festive Season
  3. Competition from producing Country
  4. Competition from other edible oils
  5. Tariff & Policies

Weather and Season Factor

The plantation of Palm Oil Tree follows their specific season and period. The whole process from planting to harvesting takes up to 4 years, and the lifespan of the tree can be up to 25 years. Palm Oil Tree requires warm weather with high humidity environment to grow up healthily as too much rainfall could flood the plantations and hamper the harvesting and dry spell would affect the plants’ growth thus lowering the production. For example, the El Nino effect influenced Malaysia’s palm oil yield in 2016. The production dropped to 3.12 tonnes per hectares which the lowest of these years (average 3.7 and above). Hence, drought or flood season can affect the yield of palm oil which the lower the production translate to a higher the palm oil price in the market.

The Festive Season

The festive season can increase the demand for oil. For example, Chinese buys for the Lunar New Year holidays, Indian buys for Deepavali while Pakistan, Bangladesh and Middle East countries buy for Eid. People use it for the religious praying purpose. With the high demand for oil use, the price will increase too.

Other than the festive season, China, India and Europe are among the largest importers of palm oil. While crisis arises in those countries like eurozone debt crisis, slowing food demand and global economic downturn, it can lead to a decrease in demand for palm oil. The consequences can cause the supply more than demand which can lower the palm oil price.

On the other hand, the short of labour on harvesting the palm fruit will affect the supply to the market too. Recently, nearly 70% of the palm industry’s workforce has extended their holiday and delaying the palm fruit harvest. There is expected a 5% to 8% drop in production due to losses of overripe fruit. Harvest the palm fruit on time can make sure the quality of palm oil and also avoid the production overcapacity or lack of supply which can affect the price.

Competitor – Indonesia

The production of palm oil in Malaysia and Indonesia has taken up around 90% of the supply to the world. Malaysia is currently the second largest palm oil exporter in the world who is surpassing by Indonesia in 2006. Indonesia expects to double their production by the end of 2030. While Indonesia keeps increasing the output, it can cause the price decrease, and the profit margin of Malaysia can be affected. Or there might be another situation is if Indonesia can supply most of the demanders in the market and with better tariff rate, Malaysia will lose our competitive ability or been forced to sell at a lower price.

Competitor- Prices of Vegetable Oils

The price of palm oil can be affected by other vegetable oils like sunflower oil, rapeseed oil, corn oil and especially soybean oil. When the bad weather falls on the soybean plantation, it can help in increasing palm oil prices. US, Brasil and Argentina are soybean producer countries, once their oil supply is below the market needs, palm oil will be the substitution.

Other than that, China is a world biggest oil-import country, when those countries have a massive production on vegetable oil like early of this year which had lower down the price of vegetable oils, China has tended to import vegetable oil instead of palm oil. The data has shown that China might break their record on the amount of vegetable oil importation. Hence, there is an inverted relationship between the vegetable oil and palm oil.

Tariff and Policies

Malaysia relies on exporting to build up the country’s economy. Hence, to hit the GDP higher government may lower down the tax rate to help in strengthening the exports and reduce the inventory level. This action can make the liquidity if the market higher which is more favourable to traders.

Besides, the tariff issue of the importing countries can suffer the palm oil producer. India is the world second largest oil-import country, and they rely on imports for 70% of its edible oil consumption. Early of this year, they had raised their import duty on crude and refined palm oil to the highest level in more than a decade which up to 54% to protect their local farmers. With this action implemented, it has forced a palm oil producer country to compete with local farmers in business.

Australia had proposed a bill of enforcing labelling palm oil as a product ingredient instead of vegetable oil. It was due to boycott as they believe palm oil plantations have contributed to deforestation. With the lower demand for palm oil-based products, therefore, affecting the palm oil price to go lower.

Conclusion

FCPO trading should not only focus on technical trade as the fundamental factors can affect the price trend. Other than the factors listed above, there is still another factor like Ringgit exchange rate. A fall in the Ringgit makes the price attractive to foreign buyers and therefore increased demand from them will raise the FCPO price. Hence, FCPO traders should not only focus on the chart but more on the essential factors of the palm oil.

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