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.

SpreadPrricing

Chart13sshowsthehisstoricalpricespreadbetweeensoybeanoilandcrudeepalmoil.

OilSpread
Chart13:SSoybeanOilvssCrudePalmO

Soybean
nOil Crude
ePalmOilPrriceSpread

25

20

15

10

Source:CM
MEGroupandBursaMalaysiaaBerhad

Therespeectiveoilmarketfundamen ntalsandcurrencyexchan ngeratesdriveethepricesppread,withpaalm

oilpriceshistoricallyattadiscounttosoybeanoil.Thediscountisconsisteentwiththelo owerquality
characteristicsofpalm mversussoybeeanoil,andmmostotherveegetableoilsaaswell.Palm
moiltypicallyssetsa
pricefloor.SinceJulyof2005,thed discountbetwweensoybean nandpalmoilfuturespricces(adjustedto
centsperpounds)hasbeenaswideeas$.217perrpoundandaasnarrowas$.0024perpound.

Thesuppllyanddeman nddynamicsb betweensoyb beanoilandppalmoilcanssubstantiallyvvaryovertime,

drivingthespreadwiderornarroweerbaseduponwhichoilissmorescarceorabundantt.Factorssucchas
productio onexpectations,usuallyasssociatedwith hweather,maydirectlyafffectthespreaadovertime..
Productsubstitutionduetonutritio onalfactorscaanalsosurfacce.Arecenteexampleofth
hisisthe
incorporaationofpalmversussoybeeanoilinU.S.foodproducttformulation nsinresponseetoamoveaway
fromhighhertransfato oils.USDASuupplyandDem mandreportssandMalaysiaanPalmOilC Councilproduction
andtradeereportsprovvideperiodicinformationtthattradersw watchasitmaayimpacttheemarket.

Addition
nalResource
es:

USDAPro
oductionRepo
orts Ifyouh
havequestionns,pleasecontact:
www.us sda.gov/oce e/commodity/wasde JohnD.Hill,Econom
mist
Commo odityResearcch&ProductDevelopment
Malaysiaan Palm Oiil Board 9301852,john.hill@cmegroup.com
(312)9
http://ww
ww.mpob.govv.my

ContractSpecifications:CrudePalmOilvs.SoybeanOilFutures

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

U.S.DollarCashSettledPalmOil SoybeanOil
FinalSettlement Thecontractwillbecashsettled.Final PhysicalDelivery
Price settlementvalueshallbetheaverage
priceofthecorrespondingFCPO
contractduringthelastfivetradingdays
twomonthspriortobecomingthe
deliverymonth.Thesettlementprice
willbeconvertedtoUSDandrounded
tothenearest$0.25usingthe
AssociationofBanksinSingaporesNon
DeliverableForward11:00am
(Singaporetime)MYRspotprice.
Spec.Position 500contractsnetlongornetshortfor 540contractsnetlongornetshortfor
Limits thespotmonth.1,000contactsforany thespotmonth.5,000contactsforany
singlecontractmonthexceptforthe singlecontractmonthexceptforthe
spotmonth.1,000contractsforall spotmonth.6,500contractsforall
contractmonthscombined contractmonthscombined
ReportableLimits 25contracts 200contracts
TradingHours 5:00pmto4:00pmChicagotime
CMEGlobex(ElectronicPlatform)6:00
SundaytoFriday
pm7:15amand9:30am1:15
pmCentralTime,SundayFriday

OpenOutcry(TradingFloor)9:30am
1:15pm,CentralTime,MondayFriday

ExchangeRule CrudePalmOilfuturesarelistedwith SoybeanOilfuturesarelistedwithand

andsubjecttotherulesandregulations subjecttotherulesandregulationsof
oftheCME 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.