Factors affecting crude palm oil (CPO) prices

While crude oil is a widely traded commodity around the world, its less popular and edible relative, crude palm oil (CPO) had also been particularly popular in the Southeast Asia region with the fluctuating palm oil prices.

Palm oil plantation Source: Bloomberg

What is crude palm oil?

In short, crude palm oil (CPO) is a plant-based oil derived from the pulp of the fruit from oil palms. Unlike its yellowish-black relative, CPO takes on a reddish colour due to the said fruit from which it is extracted. Little goes to waste for the fruit of the oil palm tree with the kernel also being used to produce palm kernel oil. Known also as vegetable lard, palm oil uses expand beyond cooking, as it has a wide variety of uses, including being utilised in toiletries and other food products.

Vast amount of land, particularly in Southeast Asian countries such as Indonesia and Malaysia, had been dedicated to oil palm plantations for CPO cultivation. However, this had also led to deforestation of habitats which is home to many endangered animals, drawing backlash.

Why is palm oil valuable?

Over and above the efficiency in having higher than average output per hectare compared to other vegetable oils, this high-yield crop is also the most produced edible oil according to 2015 statistics.1 Given the growing global population, this had only seen to continuous increasing demand. Besides cooking purposes and food products, palm oil can also be found across products such as cosmetics, toiletries (including shampoo and soap) and in biodiesel, among other uses. The versatility of palm oil is perhaps the key contributor to its value, hence the growth of the palm oil cultivation industry.

One would note that the palm oil industry is also responsible for the livelihood of a large number of people with the Ministry of Environment and Forestry in Indonesia, the top producer of palm oil, reporting 8.4 million people employed within the industry.2

Top 5 palm oil producing countries

The majority of palm oil production takes place in Southeast Asia, with Indonesia being the top producer and accounting for approximately 60% of the global supply.

Country Production (in metric tons)
1. Indonesia 36,000,000
2. Malaysia 21,000,000
3. Thailand 2,200,000
4. Colombia 1,320,000
5. Nigeria 970,000

Source: Worlddatlas3

Factors affecting crude palm oil (CPO) prices

  1. Supply
  2. Demand
  3. Environmental impact of palm oil production
  4. Substitution by other oils

Supply

As with any plant-based fuel, the standard supply and demand plays a key role in determining the price for CPO. The majority of the palm oil plantations resides in the tropical Southeast Asian countries of Indonesia and Malaysia that oftentimes find fluctuating weather patterns affecting the yield. During periods of dry spells or heavy rainfall resulting in flooding, palm oil production would be affected and subsequently prices as well.

Demand

Asia regions such as China and India are the key importers for palm oil, together accounting for a quarter of the global consumption.4 These are also countries that are expecting continued population growth, a key source for demand growth for CPO. On the other hand, import policies and regulations by importing countries may serve as trade barriers, thereby affecting the demand as well.

Environmental impact of palm oil production

According to the World Wildlife Fund, around 90% of the world’s oil palm trees are grown across Malaysia and Indonesia, islands with the most biodiverse tropical forests found on Earth. To make space for the oil palm plantations, acres of rainforests continue to be cleared which in turn endangers the rich biodiversity the habitats host. This saw to significant backlash amongst environmental groups and a public shift from many of palm oil products. That said, since 2012, the UK government had also addressed the palm oil problem by committing towards a 100% sourcing from sustainable sources.

Substitution by other oils

In light of the abovementioned environmental concerns, palm oil substitutes have also grown in popularity. Some of these such as olive and coconut oil can be seen substituting for the various uses that CPO had been put to.

How to trade crude palm oil

In the chart below, CPO prices can be seen stuck to a downtrend for the majority of 2019, before firmly breaking out of the channel into a strong uptrend. Supply had been the key factor driving the fluctuation for CPO prices in the period, though the macro picture played a part as well, with weak crude oil prices weighing on this biofuel. As can be seen, CPO prices do make for good trend trading and technical analysis can be applied here to recognise trend reversals for trade.

Find out more about commodities trading with IG

How to trade crude palm oil

How to trade crude palm oil

Sources:

1 Green Palm, 2015
2 Eco-Business, 2019
3 Worlddatlas, 2018
4 USDA, 2019


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