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In this guide, we explain how to trade on palm oil derivatives and where you can find regulated, reputable brokers in . We’ll also discuss what drives the price of palm oil and why some traders choose to speculate on this commodity.
In a hurry? If you want to get started trading palm oil, here are brokers available in to consider:
Disclaimer: Availability subject to regulations.
Between 74-89% of retail investor accounts lose money when trading CFDs.
How Can I Trade Palm Oil?
Traders have a number of options to trade palm oil, including futures, options, ETFs, shares, and CFDs.
Palm Oil Futures
The Chicago Mercantile Exchange (CME) offers two contracts that track the price of palm oil:
- USD-denominated Malaysian Crude Palm Oil Calendar Futures (CPO)
- USD-denominated Malaysian Palm Olein Calendar Futures (OPF)
The crude palm oil future tracks the price of unrefined palm oil, while the palm olein tracks the price of refined oil.
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. Both contracts are financially settled.
Palm Oil Options on Futures
The CME offers an average price options contract on USD Malaysian Crude Palm Oil.
Options are also a derivative instrument that employs leverage to trade commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium to purchase contracts.
An options bet succeeds only if the price of the crude palm oil futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in crude palm oil futures to profit from their trades.
Palm Oil ETFs
These financial instruments trade as shares on exchanges in the same way that stocks do.
There is no ETF that specifically covers palm oil. Traders looking for exposure could buy country funds in Indonesia and Malaysia. The following funds have some exposure to plantations that grow oil palm:
|iShares MSCI Malaysia Index Fund||iShares MSCI Indonesia ETF|
Shares of Palm Oil Companies
It is impossible to get pure-play exposure to palm oil prices through the equity market.
However, these three diversified, publicly-traded agribusinesses offer some exposure to the oilseed sectors:
|Company||Current Price||Overview||Exchange||Interesting Fact|
|Archer Daniels Midland||Operates facilities that convert agricultural commodities into food, animal feed and energy||New York (NYSE)||Serves 160 countries|
|Bunge Limited||Processes oilseeds, wheat, corn and sugarcane||New York (NYSE)||Company was founded in the Netherlands|
|Glencore plc||International commodity trading and mining company||London (LSE)||Company began as a metals and oil company|
Contracts for Difference ( CFDs)
A popular way to trade palm oil is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of palm oil.
The value of a CFD is the difference between the price of palm oil at the time of purchase and its current price.
Some regulated brokers offer CFDs on palm oil. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to palm oil prices without having to purchase shares, ETFs, futures or options.
IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.
Regulated Brokers: Where Can I Trade Palm Oil?
Start your research with reviews of these regulated brokers available in .
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
What Drives the Price of Palm Oil?
The price of palm oil is driven mostly by these five factors:
- Competing Oils
- Environmental Concerns
- Biofuel Demand
Most of the supply of palm oil comes from two countries – Indonesia and Malaysia. As a result, the price of the commodity can be heavily influenced by government policies and news from these countries.
The expanding population in Indonesia and the government’s push to support biodiesel has resulted in higher domestic consumption.
If these trends continue, Indonesian exports of palm oil could decline in the years ahead. This could lead to higher prices. Indonesia also levies export taxes on palm oil, which have varied throughout the years. Changes to this tax could also have an effect on palm oil prices.
The concentration of palm oil supply in a small handful of countries also magnifies the role that weather plays in determining prices.
The tropical climates of Indonesia and Malaysia make them susceptible to heavy rains and flooding. These conditions could delay the harvesting and processing of crops and create supply shortages.
Extreme dry weather could also impact prices. Oil palm plants depend on ample rain to grow and flower. Drought conditions might not only limit fruit yields on plants, but they also have the potential to kill entire plants.
Oil produced from palm fruit and kernels competes with many other oils including sunflower, soybean, rapeseed, corn, canola and cottonseed.
The demand for these oils will fluctuate mostly based on price and availability. Political and weather events in regions that produce these other grains could impact their price and availability.
Perception about health benefits and risks could also play a big role in determining demand for competing oils. Palm oil is high in saturated fats, and consumption of this type of fat is a source of controversy.
Palm oil has received a great deal of bad publicity because its production has led to deforestation in large parts of Indonesia. Producing the crop requires clearing large plots of land, and these actions impact the biodiversity and ecosystems of the growing regions.
Critics say that the production of oil palm has a devastating environmental impact. Habitat degradation, climate change, animal cruelty, and indigenous rights abuses are among the potential consequences of growing the crop.
Some organizations, including SPOTT, are promoting sustainable oil palm practices. However, if the public mood about palm oil production sours, prices could suffer.
Biofuels currently represent a small but growing use for palm oil. Factors such as the price of corn and other sources of feedstock could impact this demand.
What Factors Might Boost Palm Oil Prices?
Emerging market demand: China, India and Pakistan could all play critical roles in driving palm oil prices higher in the years ahead. The countries have enormous populations to feed.
Biofuel demand: Almost all countries are focused on sustainable sources of energy, and biofuels may play an important role in this endeavor. Buying palm oil is a way to bet on this trend.
Palm Oil Risks To Consider
Health concerns may sour consumers on palm oil consumption. The high saturated fat content in palm oil makes it a controversial dietary choice.
If more studies show detrimental health effects from palm oil consumption, demand could suffer.
Environmental concerns about palm oil production have the potential to lessen demand. In particular, Indonesia is now the third-largest greenhouse gas emitter after China and the United States. If concerns about global warming intensify, demand for palm oil could suffer.
Reasons You Might Trade Palm Oil
Traders purchase agricultural commodities such as palm oil for many reasons, but the best ones include:
- Inflation Hedge
- Bet on Demand Growth
- Portfolio Diversification
Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions.
Tading palm oil might be a way to hedge against the loss of purchasing power from inflation.
Global central banks have kept interest rates low for an extended period of time. This has led to speculation in many asset classes including equities, bonds and real estate. At some point, the low rate environment could produce serious inflation.
Some commodities have been strong in recent years, but on average they have not kept pace with gains in other asset classes. In periods of inflation, food prices are almost certain to rise. Trading palm oil may be a way to profit from asset inflation.
Bet on Demand Growth
Three of the top five importers of palm oil are the fast-growing countries of India, China and Pakistan.
As the populations of these countries increase, their demand for food is certain to grow. The presence of palm oil in so many items means it is likely to see higher prices.
As many emerging countries grow wealthier, their consumption of meat should rise. Since palm kernel is used in animal feed, demand for this product may grow as well.
Most traders have the vast majority of their assets in stocks and bonds. Commodities such as palm oil provide a way to diversify and reduce overall portfolio risk.
If you are interested in agricultural commodities like palm oil, see our Agricultural Commodity Guide where we provide more trading guides for commodities like:
- Cocoa: Is Cocoa A Commodity Worth Trading?
- Rough Rice: What Role Does Rice Play In The Global Economy?
- Soybeans: How and Where Can You Trade Soybeans?
- Sugar: Why Should Or Shouldn’t You Trade Sugar Derivatives?
- Wheat: What Ways Can You Trade Wheat As a Commodity?
Also see our guides on stock, CFD, and commodity brokers to find out which online trading brokerages are available in .