Palm Oil- Volatility For The Multipurpose Commodity

Palm oil is primarily used for cooking in developing countries, and it is also an ingredient in food products, detergents, cosmetics, and to a lesser extent, in biofuel production. Crude palm oil futures trade on the Chicago Mercantile Exchange, and each contract calls for 25 metric tons of Malaysian Crude Palm Oil. The futures are far from liquid, but they provide a benchmark for the commodity’s price. 

Countries with tropical climates are the leading producers

Palm trees thrive in moist and hot climates. Palm oil is an edible vegetable oil that comes from palm oil trees’ fruit. Scientists that study trees, or dendrologists, call palm oil trees Elaeis guineensis.  Crude palm oil comes from squeezing the fleshy fruit, and palm kernel oil comes from crushing the kernel or the stone in the middle of the fruit. The world’s palm oil-producing countries are:

Source: Worldagriculturalrpoduction.com

Indonesia and Malaysia are the dominant palm oil-producing countries. Around 90% of the world’s oil palm trees grow on a few islands in Malaysia and Indonesia. The Islands have the most biodiverse tropical forests on the face of the Earth. 

The most populous countries are the top consumers 

China and India are virtually tied for the world’s most populous countries, with over 35% of the nearly eight billion people, and both have over 1.4 billion people. Meanwhile, Indonesia is fourth behind the US and ahead of Pakistan, with over 275.5 million residents. The top palm oil-consuming countries in 2022 are:

Source: indexmundi.com

Meanwhile, Indonesia and Malaysia dominate exports:

Source: indexmundi.com

The CME contract likely calls for Malaysian Crude Palm Oil because of Indonesia’s political volatility. The Indonesian government has banned exports of many raw materials over the past years. In April 2022, Indonesia President Joko Widodo announced a ban on exporting palm oil, subsequently clarifying the policy prohibiting only refined palm oil exports. Malaysia has been a reliable exporter, but Indonesian policies have caused significant price volatility in the palm oil market. The Indonesian government lifted the ban in May, causing prices to drop. 

Palm oil consumption- Everything in moderation

Palm oil is the most produced, consumed, and traded edible oil worldwide and accounts for around 40% of the supply of the top four most popular edible oils, palm oil, soybean oil, rapeseed oil (canola), and sunflower seed oil. 

Palm oil is rich in antioxidants, one of which is vitamin E, critical for keeping immune systems healthy and cell communication. However, the fat in palm oil tends to increase cholesterol levels. Like most things in life, moderation is critical for humans with palm oil consumption. 

The price soared and corrected from a record high in March 2022

Palm oil is one of many commodities that have experienced substantial rallies since the 2020 pandemic-inspired lower. 

The chart shows CME crude palm oil futures exploded from $452.50 per metric ton in May 2020 to a high of $1,611.75 in March 2022, an over 256% rise. At the $946.25 per ton level on August 23, the price remained over double the level at the May 2020 low after correcting from over the $1,600 level. 

Soybean oil, canola, and palm oil prices follow a similar path

Edible oils have followed the same path as palm oil since 2020. 

The chart shows the rise in CBOT soybean oil prices from 24.64 cents per pound in April 2020 to a high of 91.40 cents in April 2022, a 271% gain. At the 69.88 cents level on August 23, the price was over 2.8 times the 2020 low. 

The canola chart shows the price of rapeseed oil rose from $444.30 per ton in March 2020 to $1,220.90 in April 2022, a 175% increase. At the $848.00 level on August 23, canola was significantly higher than the 2020 low after correcting from the April 2022 high. 

Inflation, trade issues, geopolitical tensions, and weather events have caused edible oil prices to soar over the past years. The rise in biofuel demand has also put upward pressure on the oil prices. Palm oil is the world’s leading edible oil, and all signs point to a continuation of price volatility in the multi-purpose agricultural commodity. 

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