Palm oil is an editable oil, derived from the mesocarp of the fruit the oil palm. Palm oil is a light yellow liquid or semi-solid substance while at room temperature. It becomes clear yellow upon heating the oil. This type of oil is commonly used in food preparation in the tropical belt of Africa, Asia and parts of Brazil. The oil is also becoming increasingly popular in major food-production industries, such as instant noodles and snack foods. It is currently the most traded vegetable oil in the world.
Palm oil is being traded as a commodity on the Bursa Malaysia in Kuala Lumpur, Malaysia . Traders from all over the world can buy and sell Palm Oil Future Contracts and Options in order to protect themselves against price fluctuations. There are also numerous speculators active on the exchange who only trade for possible profits. The price of Crude Palm Oil Futures (FCPO) on this exchange functions as a benchmark for the global price of palm oil futures. Furthermore the prices of FCPO also serve as a reference point for pricing of other oils and fats industries.
An important price factor is the increasing demand for palm-oil. Global demand for palm oil is rising at a far more rapid pace than the production capacity of leading producers Indonesia and Malaysia. The rising demand is caused by the food and biofuels industries. Furthermore the physical limitations of available land for the plantations is limiting the production capacity. These factors will result in a higher palm oil shortage and subsequently will move manufacturers to look for alternatives.
The weather is a critical element in the creation of a price for palm oil. The major plantations are located in Malaysia and Indonesia. In this tropical climate there is a reasonable risk for extreme rainfall, which can significantly impact the quality and size of the harvest. In these types of situation the price will show a sharp rise due to the supply shortage.
Substitutions can play a considerable role in the realization of palm oil prices. Similar products like soy and corn oil can be used as a substitution for palm oil. If these commodities can be purchased at a more favorable price, this will decrease the demand for palm oil. Monitoring the prices of substitutes can therefore prove an important part in predicting upcoming prices for palm oil.
Biofuels are partially responsible for the price creating of palm oil. In western countries the demand for green fuels is becoming more prominent. Palm oil is an integral ingredient in the creation of biofuels and therefore its demand will increase significantly. The correlation between biofuels and palm oil is therefore quite strong.
