Classroom Corner. Demystifying a commodity: Crude palm oil

Oil extracted from the palm’s pulp is called palm oil, an edible oil that has many commercial variants such as crude palm oil (CPO), refined palm oil and palmolein.

Palm oil is used for cooking in South-East Asian countries, West Africa, and some parts of Brazil. It is also widely used by the commercial food industry, given its lower cost, and for producing biofuels.

Indonesia, Malaysia, Thailand and Colombia are the major producers of crude palm oil, with Indonesia, Malaysia, Benin and Papua New Guinea being the major exporters, as per 2015-16 data.

India, the European Union, China and Pakistan are the major importers of the commodity, and as for consumption, India is the largest consumer in the world, followed by Indonesia, the European Union and China.

CPO futures traded on the Bursa Malaysia Derivatives Exchange (BMD) is the most popularly followed. It’s also traded on MCX and NCDEX in India.

CPO futures is traded on MCX, and the product symbol is CPO. The minimum trade size — that is, one lot — is 10 tonnes or 10,000 kg. The quotation value, which is the value at which prices are quoted on the terminal, is per 10 kilogram. So, if the current market price is ₹500 per 10kg, one lot of CPO contract will cost ₹5 lakh. On an average, about 3,350 lots are traded everyday.

Traders or hedgers need not pay the entire amount upfront. Rather, a small margin amount is sufficient. This initial margin price is 4 per cent of the cost. Besides this, you will also be charged brokerage fee, stamp duty, commodity transaction tax, service tax and other charges, which account for about 0.01 to 0.02 per cent of the contract cost.

The average of the last three days’ spot market prices is taken for final settlement of the contract. Settlement can be done either in cash or through physical delivery.

There are international and domestic factors that impact the prices of the CPO. Any adverse weather conditions in major producing nations impact the supply which, in turn, impacts the prices of the commodity in India.

Also, any changes in the demand in major consuming countries such as India, China and EU due to policy changes or availability of substitutes with lower price impact the price. Increase in the price of crude oil will elevate the demand for CPO in bio-diesel production. Volatility in foreign exchange rates also impacts the commodity’s prices.

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