AgriculturalProducts

AnOverviewoftheEdibleOilMarkets: CrudePalmOilvsSoybeanOil
July2010
Ediblevegetableoilsaresomeofthemostcrucialcookingingredientsintheworld.Inaddition,edible oilsareusedintheproductionofsoaps,washingpowders,personalcareproductsandbiofuels. However,twoedibleoilssoybeanoilandpalmoilaccountforroughly61percentofthetotalworld production.Chart1providesabreakdownoftheworldsedibleoilproductionin2009.
Chart1:WorldEdibleOilProduction

In2009,palmoilandsoybeanoilaccountedfor33percentand28percentofworldproduction, respectively.FollowingtheMay24,2010launchofU.S.DollarCashSettledCrudePalmOilfutures,you cannowhedgebothoftheseproductsinonelocationonCMEGlobex,theworldsleadingelectronic tradingplatform.Inthispaperwewillexaminethefundamentalsforsoybeanoilandpalmoil,thekey supplyanddemanddrivers,andthemechanicsforthefuturescontractstradedonCMEGlobex.

PalmOilFundamentals

PalmOiliscurrentlythemostconsumededibleoilintheworld,withMalaysiaandIndonesiabeingthe toptwoproducers.PalmoiloriginatedinWestAfricainthe1800sandwashighlysoughtafterbymany Europeans.ThislowcostoilbeingimportedintoEuropewasprimarilyusedforsoapsandasalubricant duringBritainsindustrialrevolution.Itwasin1910thatoilpalmtreeswerefirstintroducedinto Malaysia.WilliamSimeandHenryDarbystartedtheoriginalplantations,whichremainedLondonbased companiesuntilthe1960s.TheMalaysiangovernmentthenapprovedaMalaysianisationactthat consolidatedallofthecompaniesandretookcontroloftheplantations.Thiscreatedtheworldslargest plantationwhichisnowknownasMalaysiaSimeDarbyBerhad. Production ThroughJulyof2010alittleover43millionmetrictons(MMT)ofpalmoilhavebeenproducedwith87 percentcomingfromIndonesiaandMalaysia.Currently,thelargestproducingcountryisIndonesia whichhasproduced24.5MMTsofarthisyear.Thisaccountsfor50percentoftheworldsproduction. Malaysiacomesinsecondat18.6MMT(38percent),followedbyThailand1.5MMT(3percent)and ColombiaandNigeriaat0.8MMT(2percent)each.Theremainderoftheproducingcountries accountedfor3.1MMT(6percent).Chart2showsworldpalmoilproductionfrom2005.
Chart2:WorldPalmOilProduction

Map1showstheprimarypalmproductionareasforIndonesia.

Map1:IndonesiaPrimaryPalmProductionAreas

Imports ThethreelargestimportingcountriesareIndia,ChinaandtheEU27whichthroughJulyimported8.2 MMT(22percent),7.2MMT(19percent)and5.3MMT(14percent)respectively.IndiaandChina primarilyusepalmoilforcookingwhiletheEU27importspalmoilforbiofuelsproduction.Allother countriesimportlessthan3percent,withtheexceptionofPakistanwhichhasimportedalittlemore than2.3MMT(7percent)fortheyear.Chart3showsimportsdatingbackto2005.

Chart3:PalmOilImports

Exports MalaysiaandIndonesiaarethetwolargestexportingcountriesofpalmoilaccountingfor89percentof worldexports.In200910,Malaysiaexported15.9MMT(42percent),whileIndonesiaexported19.0 MMT(50percent).TheonlyothernotableexportersareBenin,PapuaNewGuineaandUnitedArab Emirates,whicheachexportunder1percent.Chart4showspalmoilexportsforthepastfiveyears.

Chart4:PalmOilExports

DomesticConsumption Aspreviouslynoted,ChinaandIndiaarethelargestimportersofpalmoil,andasaresult,theyarealso thetoptwoconsumers.Indiahasconsumed8.1MMT(17percent)andChina7.2MMT(15percent)so farthisyear.Also,IndonesiaandtheEU27haveeachconsumedroughly11percentofworld productionfortheyear.Chart5givesabreakdownofeachcountrysconsumptionfrom2005.

Chart5:DomesticPalmOilConsumption

EndingStocks Malaysiacontinuestocarrythelargestendingstocksofallproducingcountries.Currentlyitiscarrying 1.8MMTwhichaccountsfor32percentoftheworldsendingstocks.Indonesiaisthenextlargest holderofpalmoilstocks,with1.0MMT(17percent).Theworldstockstouseratiohasremained constantat11percentoverthepastsixyearsasgrowthinstockshasbeenmatchedbygrowthin demand.Chart6showsendingstocksfrom2005.

Chart6:PalmOilEndingStocks

SoybeanOilFundamentals
Production Currently,theUnitedStatesisthelargestproducerofsoybeanoilasitaccountsforalittlemorethan23 percentoftheworldsproduction.However,U.S.productionhasremainedsteadyoverthelastdecade, whileChinasproductionhasincreasedrapidlyandnowaccountsfor22percentoftheworldmarket. SouthAmericaproductionisalsogrowingquickly,withArgentinaandBrazileachaccountingfor16to17 percentoftheworldproduction;itisexpectedthatthesetwonationswillcontinuetoincreasetheir processingcapacity.Chart7showstheWorldSoybeanOilProductionfrom2005.

Chart7:WorldSoybeanOilProduction

Source:USDA

Maps2through2showthemajorsoybeangrowingregionsaroundtheworld.
Map2:U.S.SoybeanProduction

Map3:BrazilSoybeanProduction

Map4:ArgentinaSoybeanProduction

Imports ChinaandIndiaarethetwolargestimportersofsoybeanoil.Currently,eachcountryimportsover1.5 MMTayear,accountingforover45percentoftheworldimports.TheEUsimportshavedeclinedas rapeseedandcrudepalmoiltendtobemorepreferred.Chart8showssoybeanoilimportssince2005.

Chart8:SoybeanOilImports

Source:USDA

Exports SouthAmericaisbyfarthelargestexporterofsoybeanoil.Argentinaexportsalittleover4.5MMTper yearwhichaccountsfor50percentoftheworldsexports.Brazilisthethirdlargestexporterat1.4 MMT.Combined,thesetwocountriesexportover65percentoftheworldssoybeanoil.TheU.S.was thesecondlargestexporterin200910at1.5MMT,representing16percentoftotalexports.Chart9 showsworldsoybeanoilexportsfrom2005.

Chart9:SoybeanOilExports

Source:USDA

DomesticConsumption ChinaandtheU.S.arethetwolargestconsumersofsoybeanoil.Betweenthetwocountriesthey consumealmosthalfoftheworldsproduction.Chinausedjustover10MMTwhichisroughly27 percentofworldconsumption.TheU.S.consumed7.4MMT,whichisalittlelessthan20percent. Brazilisthethirdlargestconsumerusingalmost5MMT,representing13percentoftotalworld domesticconsumption.Chart10showsdomesticsoybeanoilconsumptionsince2005.

Chart10:DomesticSoybeanOilConsumption

EndingStocks TheU.S.carriesthelargestendingstocksofallproducingcountries.Infact,theU.S.holdsalmost50 percentoftheworldsendingstocksofsoybeanoil.Onaverage,overthepastfiveyears,theU.S.has kept1.3millionmetrictonsofsoybeanoilinendingstocks.Brazilholdsthesecondlargeststocks, averaging0.3millionmetrictons,whichisalittlemorethan12percentoftheworldsendingstocks. Chart11showssoybeanoilendingstockssince2005.

Chart11:SoybeanOilEndingStocks

FundamentalPriceDrivers

Overthepastdecadetheprimarydriverforsoybeanoilandpalmoilpricedirectionhasbeenthestrong growthdemand.WorldpopulationandGDPgrewatarapidpacepriortotheglobalrecessionof2008 09,leadingtoincreaseddemandforfoodandtheuseofbothoilsasfeedstocksforbiofuelproduction. Thiscreatedanewsourceofdemandforbothoils.However,thecyclicalnatureofcropproduction oftenresultsinalaginsupplyforshortperiodsoftime.Wehaveseenthisinthepastfiveyearswithall commodityproducts,duetotheexponentialgrowthindemandfromChina. Chart12isahistoricalchartofsoybeanoilfuturespricesversuscrudepalmoilfuturespricesthathave beenconvertedtocentsperpound.

Chart12:SoybeanOilFuturesvs.CrudePalmOilFutures

Source:CMEGroupandBursaMalaysiaDerivativesBhd

Weatheralsoplaysapivotalroleinpricedirection.Mostofthepalmgrowingareasarelocatedin rainforests,wherewetweatheristhenorm.However,frequentcyclonesthatmovethroughthose areascanbringexcessiverain,resultinginfloodingofpalmplantations.Ontheflipsidetothisarethe periodsofexcessivedrynessintheplantationareasthatcanstressthepalmtrees.Withmostgrowing plantationsnearcoastalareas,manycanbeaffectedbyprolongeddryconditionscreatedbyElNino weathereffects. Forsoybeanoil,pricingeconomicsandweathertendtobethekeydriversinoverallproduction.Aswith palmoil,soybeanoilpricesareprimarilydeterminedbysupplyanddemand,withsupplyoften dependentoncompetingcropssuchascorn,wheat,riceandcotton.Dependingonthecorn/soybean priceratio,producersinmanygrowingareascaneasilyswitchacreagebetweenthesetwocrops. Finally,exchangerateexposurehasbecomeakeyfactorinthedemandforbothoftheseedibleoil products.Withtodayscommoditymarketsbecomingmoreandmoregloballyconscious,traderslook forthemosteconomicalproducttopurchase.Ifthecurrencyinaparticularcountrygetstoohighyou willseedemandshifttoothercountrieswithcheapercurrency.Conversely,ifacountryhasastrong currencytheywilllikelyconsumemorefromothercountriesastheycanbuytheseproductsata cheapercost.

SpreadPr ricing Chart13shows s thehis storicalpricespreadbetwe eensoybeanoilandcrude epalmoil. Chart13:Soybean S Oilvs sCrudePalmOil O Spread

Soybean nOil Crude ePalmOilPr riceSpread

25 20 15 10 5 0

Source:CM MEGroupandBursaMalaysia aBerhad

Therespe ectiveoilmarketfundamen ntalsandcurrencyexchan ngeratesdrive ethepricesp pread,withpa alm oilpriceshistoricallyat tadiscounttosoybeanoil.Thediscountisconsiste entwiththelo owerquality characteristicsofpalm mversussoybe eanoil,andmost m otherve egetableoilsas a well.Palm moiltypicallysets s a pricefloor.SinceJulyof2005,thediscount d betw weensoybean nandpalmoilfuturespric ces(adjustedto centsperpounds)hasbeenaswide eas$.217per rpoundandas a narrowas$.0024perpound. Thesuppl lyanddeman nddynamicsbetween b soyb beanoilandpalm p oilcansubstantially s vary v overtime, drivingthespreadwiderornarrowe erbaseduponwhichoilis smorescarceorabundant t.Factorssuc chas productio onexpectations,usuallyas ssociatedwith hweather,maydirectlyaf ffectthesprea adovertime. . Productsubstitutionduetonutritio onalfactorsca analsosurfac ce.Arecentexample e ofth hisisthe ationofpalmversussoybe eanoilinU.S.foodproduct tformulation nsinresponse etoamoveaway incorpora fromhigh hertransfatoils. o USDASu upplyandDem mandreports sandMalaysia anPalmOilCouncil C production andtrade ereportsprov videperiodicinformationthat t traderswatch w asitma ayimpactthe emarket.

Addition nalResource es:

USDAPro oductionRepo orts www.us sda.gov/oce e/commodity/wasde an Palm Oi il Board Malaysia http://ww ww.mpob.gov v.my Ifyouhave h question ns,pleasecontact: JohnD.Hill,Econom mist Commo odityResearc ch&ProductDevelopment (312)930 9 1852,john.hill@cmegroup.com

ContractSpecifications:CrudePalmOilvs.SoybeanOilFutures
TradingUnit Underlying Instrument SoybeanOil 60,000pounds(lbs)(~27metrictons) Crudesoybeanoilmeetingexchange approvedgradesandstandardssee exchangeRulesandRegulationsfor exactspecifications. U.Sdollarsandcentspermetricton Centsperpound USD$0.25permetricton 1/100ofacent($0.0001)perpound ($6.00percontract) 2.5centsperpoundexpandableto3.5 Thereshallbenotradingin$CSCPO futuresatapricemorethan10%above centsperpoundandthento5.5cents orbelowthepreviousdayssettlement perpoundwhenthemarketclosesat limitbidorlimitoffer.Thereshallbeno price,unlessthecorrespondingFCPO contractistradingatexpandedlimits. pricelimitsonthecurrentmonth Ifthisweretobethecase,the$CSCPO contractonorafterthesecondbusiness dayprecedingthefirstdayofthe contractwouldtradeattheexpanded limitsaswell. deliverymonth. Monthly(listthethird,fourthandfifth January(F),March(H),May(K),July(N), forwardmonths)thenalternatemonths August(Q),September(U),October(V) &December(Z) goingout24months. th Thebusinessdaypriortothe15th Noononthe15 calendardaytwo monthspriortobecomingthedelivery calendardayofthecontractmonth. month.Forexample,theJuly2010 contractwouldexpireatnoononMay 14,2010.Ifthe15thisanonmarket day,thecontactwillsettleonthe precedingbusinessday. Sameprocedureasallotheragricultural Sameprocedureasallotheragricultural productsoutlinedinRule813(VWAPof productsoutlinedinRule813. thelast5minutesoftrade,failingthis, theVWAPofthelast15minutes.Ifa VWAPcannotbecalculatedwewilltake themidpointofthebidaskspreadat 1:15pmCST) U.S.DollarCashSettledPalmOil 25metrictons BursaMalaysiaDerivativesBerhad CrudePalmOilFutures(FCPO)

PriceBasis TickSize DailyPriceLimits

ContractMonths

LastTradingDay

DailySettlement Price

FinalSettlement Price

U.S.DollarCashSettledPalmOil Thecontractwillbecashsettled.Final settlementvalueshallbetheaverage priceofthecorrespondingFCPO contractduringthelastfivetradingdays twomonthspriortobecomingthe deliverymonth.Thesettlementprice willbeconvertedtoUSDandrounded tothenearest$0.25usingthe AssociationofBanksinSingaporesNon DeliverableForward11:00am (Singaporetime)MYRspotprice. Spec.Position 500contractsnetlongornetshortfor Limits thespotmonth.1,000contactsforany singlecontractmonthexceptforthe spotmonth.1,000contractsforall contractmonthscombined ReportableLimits 25contracts TradingHours 5:00pmto4:00pmChicagotime SundaytoFriday

SoybeanOil PhysicalDelivery

540contractsnetlongornetshortfor thespotmonth.5,000contactsforany singlecontractmonthexceptforthe spotmonth.6,500contractsforall contractmonthscombined 200contracts CMEGlobex(ElectronicPlatform)6:00 pm7:15amand9:30am1:15 pmCentralTime,SundayFriday OpenOutcry(TradingFloor)9:30am 1:15pm,CentralTime,MondayFriday

ExchangeRule

CrudePalmOilfuturesarelistedwith andsubjecttotherulesandregulations oftheCME

SoybeanOilfuturesarelistedwithand subjecttotherulesandregulationsof theCBOT

FormoreinformationonCrudePalmOilfutures,visit www.cmegroup.com/palmoil

Sources ChartsofEdibleOil,PalmOilandSoybeanOilProduction,Consumption,Import/Export andEndingStocks:USDA Maps:Asindicated

Futurestradingisnotsuitableforallinvestors,andinvolvestheriskofloss.Futuresarealeveragedinvestment,andbecause onlyapercentageofacontractsvalueisrequiredtotrade,itispossibletolosemorethantheamountofmoneydepositedfor afuturesposition.Therefore,tradersshouldonlyusefundsthattheycanaffordtolosewithoutaffectingtheirlifestyles.And onlyaportionofthosefundsshouldbedevotedtoanyonetradebecausetheycannotexpecttoprofitoneverytrade.All referencestooptionsrefertooptionsonfutures. CMEGroupisatrademarkofCMEGroupInc.TheGlobelogo,CME,ChicagoMercantileExchangeandGlobexaretrademarksof ChicagoMercantileExchangeInc.CBOTandChicagoBoardofTradearetrademarksoftheBoardofTradeoftheCityofChicago. Allothertrademarksarethepropertyoftheirrespectiveowners. TheinformationwithinthisbrochurehasbeencompiledbyCMEGroupforgeneralpurposesonly.CMEGroupassumesno responsibilityforanyerrorsoromissions.Additionally,allexamplesinthisbrochurearehypotheticalsituations,usedfor explanationpurposesonly,andshouldnotbeconsideredinvestmentadviceortheresultsofactualmarketexperience.All matterspertainingtorulesandspecificationshereinaremadesubjecttoandaresupersededbyofficialCMEandCBOTrules. Currentrulesshouldbeconsultedinallcasesconcerningcontractspecifications. Copyright2010CMEGroup.Allrightsreserved.