Trading in Malaysia FCPO

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BMD’s top broker based on FCPO trading volume, shared his outlook on FCPO and how it can be a great alternative investment, when done correctly.

By Ariel Chew

Crude palm oil futures (FCPO) is rapidly gaining momentum. Last year, FCPO formed 80% of all contracts traded on the Bursa Malaysia Derivatives (BMD) Exchange and the numbers are rising.

According to Attan Akmar, Executive Director Dealing, TA Futures Sdn Bhd, in the month of February 2017, institutions accounted for 72% of the volume traded compared to 28% for retail and speculative
traders. In the advanced markets the reverse is the case.

“The trading of crude palm oil futures (FCPO) is done by speculators to gain from the price movement of the contract on the exchange. The volume of contracts traded by speculators is a testament of the profitability of trading the FCPO,” said Attan (right).

“As a rule, speculators exit their positions once they have made a profit which is usually well before the settlement date and they usually trade the same contract numerous times before the settlement date,” he explained.

Factors to Look Out For

According to Attan, the price of physical crude palm oil (which translates to the FCPO price) is subject to several influencing factors:

  1. Changes in other competing edible oils, primarily soy oil.
  2. The Ringgit exchange rate. A fall in the Ringgit makes the price attractive to foreign buyers and therefore increased demand from them will raise the FCPO price.
  3. Adverse weather conditions which will reduce production quantities and boost the price
  4. The price of crude oil when it is high enough to make it profitable to blend cheaper palm oil into bio-fuel
  5. The seasonal variation in palm oil yield. The peak season is between July and October with the trees taking a rest towards the year end
  6. Festival periods during which demand will increase from major palm oil importers. China buys for the Lunar New Year holidays, India buys for Deepavali while Pakistan, Bangladesh and the Middle East buy for Eid.
  7. Indonesian palm oil output since it is the biggest producer, and
  8. Immigration rules since the plantations primarily depend on imported labour for harvesting.

One has to look at all the above influences as well as general economic conditions in the importing countries in order to make a good assessment of the FCPO price trends.

A Viable Alternative Investment

In the past few weeks, Attan noted an upsurge in FCPO volume which indicates that the market is active and fully reacting to developments in the industry.

“There is now still a shortfall of supply resulting from the El Nino phenomenon in 2016 and the experts are saying that it will only be around July 2017 that supply and demand will equalise if weather remains accommodative till then.

“In the long run, demand growth will outpace that of supply but price volatility will continue as different factors come into play,” he surmised.

“There are many advantages of trading futures including the opportunity to profit from both rising and falling prices. Only between 4% to 8% of the total cost of a futures contract is required to be deposited as margin; as such the return (and loss) on investment can be very high.

“With online trading being offered by all brokers, one can conduct his trading just anywhere in the world as long as there is an internet connection,” he stated.

Keys to Success

As opposed to the hedging of physical positions by the palm oil industry players, the trading of FCPO by speculators requires much more skill and analysis. Speculators provide the necessary market liquidity to enable the hedgers to enter and exit the market.

The traders’ profits are derived from the price volatility of FCPO and this same volatility together with the leveraged nature of futures can bring the trader huge profits or damaging losses. For every trade, the trader must beforehand determine how much loss he can absorb.

“The trading gurus usually suggest that this must not exceed 2% of the total capital employed. The trader then works out by how much the price can move before this 2% loss is reached,” shared Attan.

“This stop loss price must be adhered to religiously to preserve his trading capital and there is no place for emotion or wavering, something that is difficult to do for a novice trader. When the price moves in favour of the trader he should ride the gain as long as practicable before exiting. Those who have mastered this technique are the ones who survive in the market,” he added.

He cautions that while many individuals trade futures for a living, a novice trader must first learn the ropes by going through training and investing a little at a time, cutting losses without being emotional about it and riding on the profits for as long as possible.

For more information on how to start trading futures, feel free to contact TA Futures by visiting their website at www.tafutures.com.my

Bursa Malaysia also provides educational reference for the public. To view onmarket trends, product information and recommendations from opinions leaders, please visit www.bursamarketplace.com

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