Weathering a Bull Palm Oil Market


Look up the factors that define the price of gold or oil and you'll never once see weather under any category, not even when stormy seas cause a shipwreck that leaves Arctic wildlife drenched in crude.  Metals and energy live according to the whims of man, not nature, while agricultural commodities carry both the advantages and disadvantages of climate shifts.  The climate shift coming to your doorstep in 2016, the all-important El Nino weather current, will affect the day-to-day lives of Americans in only a few minor ways -- with the sole exception of those who put their money in the commodities market.  The worldwide shift between hotter and drier, cooler and wetter, and everything in between will dictate the performance of a number of crops, perhaps none more so than palm oil.  Felda Global Ventures, one of the largest palm plantation owners on the planet, estimate that the 2016 El Nino patterns will cut palm Indonesia's palm oil output by as much as six percent, potentially springboarding the commodity to over $600 per ton.

What's In A Name

First popularized in the late 1990s, along with Netscape Navigator and the Macarena, El Nino fluctuates across the equator of the globe when prolongued hotter temperatures cause the Pacific Ocean belt to generate excess hot vapor through evaporation.  After a year like 2015, which the NOAA called the hottest in recorded history, it's little surprise that the aftershocks will come in 2016.  The 2016 El Nino current brings lots of good news: moisture to drought-ridden California, warmer air currents to frigid Michigan, Minnesota, and Wisconsin, and cooler wet air flows bringing Christmas snow to Texas.  The United States will be a net beneficiary of the next El Nino cycle, which cannot be said for many other nations, most notably the tropical regions of the globe responsible for water-intensive crops.  All the water soaked up and dumped on the opposite side of the globe means less rainfall for Indonesia and Malaysia, who account for 90% of the world's production.  "Less" rainfall is a relative term -- the driest part of Indonesia gets about the same amount of rain as Seattle, while the island of Sumatra gets half an inch per day on average.  What's more, palm oil requires much less water than some other agricultural commodities: it takes 2000 gallons of water to make a single pound of chocolate.  Yet the overall picture for 2016 appears clear, with too little water to meet a global demand that's shot up significantly.

Repeating Repetitions

Palm oil has seen fluctuations in value during its brief history on the commodities trading board.  A similar El Nino phenomenon in 2009 pushed the price of the commodity up by over 50%, just one year after bumper harvests saw such an abundance of the crop to drop nearly 70% in value over the course of 2008.  While the palm oil industry wants to take precautions by buying up water and irrigation rights, the heads of palm oil producers appear to see the writing on the wall.  Mohd Emir Mavani Abdullah, a spokeperson for the third-largest palm oil producer Felda Global Ventures, announced that prolonged dryness would lead to both decreased yields and higher prices.  He mentioned that the upcoming winter harvest (since Indonesia sits on the equator, winter days are like every other day -- 90 degrees and rainy) means that we need not wait until 2016 to see price spikes go into effect.  Abdullah claimed that Malaysian stockpiles could drop to 2 million tons, about a 20% dip, as decreased yields in tandem with higher demand clears out existing supply.  It's welcome news for Malaysia, whose palm oil stocks have hit three-year highs following a 36-month stretch of no net gains.

Demand and Lack of Supply

The decline of palm oil comes at an opportune time for investors given the recent pushes to convert palm oil holdings in Indonesia and Malaysia to biofuel.  While neither nation is hurting for petroleum (Indonesia sits at 22 on the list of world producers, Malaysia at 26), both nations' politicians have began to put plans in motion to convert existing stocks of declining-value palm oil into fuel.  Indonesian president Joko Widodo recently signed regulation that imposes a $50 per ton levy on palm oil meant to finance the conversion to biofuel and use up existing oversupply.  With more and more investors willing to purchase an inexpensive stake in palm oil thanks to depressed prices, there's no question that the market wants as much palm oil as possible.  This creates a perfect situation in which investors can ride the decline in production through at least the next 12 months to lucrative returns.

  • The Takeaway: palm oil looks more appealing at the moment than any other agricultural commodity.  Our last advice recommended to buy and sell for delivery come January of 2016.  While this still remains a fantastic growth option, investors should look slightly further down the line and long palm oil commodity delivery for summer of 2016, when the actual harvests come in with less-than-desired results.  With a ceiling of $600 to $650 per metric ton, there's ample room to grow.  The last palm oil boom cycle saw rapid growth: don't be tempted to sell off after two weeks of good returns, as a bit of patience can see the prices rise even higher.
  • Investing in palm oil for longer than 12 months becomes increasingly risky.  Often an El Nino weather pattern follows up with the La Nina, where cooler temperatures create more condensation over the ocean and thus lead to greater rainfall.  Should the 2016 cycle quickly change following hurricane season, it's possible for palm oil to lose a lot of its value on a strong harvest.

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