How to tell when Crude Palm Oil (CPO) prices are going to drop in Malaysia - Explained

The three main factors that affect CPO prices and are constantly mentioned by commodities experts are the closing stockpile inventories, exports and production. Knowing how these factors affect CPO price trend is a good idea, especially if you have plantation stocks in your watchlist.

Here is an interesting chart I have plotted based on the Malaysia's Palm Oil Board data.

Notice how Palm oil exports and CPO produced moved consistently with each other. Now take note of the Closing Stockpile has been hang on highs since September 2011. They are indicated by the red lines on the chart. The widest gap between tonnes exported/produced and closing stocks on Feb 2012 couldn't have been more alarming!

But hold your horses!

Before you draw any conclusion, lets take a look at the 1-year period CPO Price Chart from 15 May 2011 to 15 May 2012. Rally period starts from Sept 2011 to April 2012 before prices started to decline.

The CPO price rally starts around the end of September 2011.

By April 2012, Palm Oil prices started declining from its peak at around RM 3,600 a tonne.

Now take a look at the 3-factors chart above and notice that September is when the closing inventory stockpile started to build up and real CPO exports (and production) started declining instead?

Picture this- Everyone is asking you for palm oil, pushing demands and causing palm oil prices to soar. You have little. You produce lesser every month and hence, exports lesser every month too. Prices are so good that if you have any excess you would want to ka-ching them, right? So why keep stockpile when you could export them?

Now, get it? But who and why are they stockpiling? Are they letting go their stocks now to flood the market which causes the CPO price decline?

Your guess is as good as mine!

Consequently, public listed palm oil stocks are negatively affected with most of them show declining quarterly net profits for the period of Jan - Mar 2012 (3-factors chart shows exports and production fell). Here are posts on some of the palm oil companies if you would like to read further.

16 May- Tradewinds Plantations quarterly earnings fell 91% to RM 4.34 million due to lower sales at unfavourable palm products prices, revenue rose 164% to RM 608.45 million due to contribution from Mardec Bhd

15 May - United Plantations' Q1 2012 net profit falls 15.6% on higher wages and lower selling prices of CPO, anticipates CPO prices to weaken in second half of 2012 due to recovery in the biological yield cycle coupled with more favourable weather conditions

25 April- TH Plantations reported decline of 40% in net profit to RM 13mil affected by higher production costs, Maybank Research says results underperformed and accounted only 10% of its FY12 forecast, target price RM 2.75 (HOLD)

Take note that the above scenario should not be relied to interpret any future outcomes as this scenario may not repeat perfectly again in the future or the impact may not be similar even if the scenario repeats itself. Every event should be studied and analysed on a case-to-case basis. Please read the disclaimer statement.

Source: CPO data from www.mpob.gov.my and CPO Price graph from www.palmoilhq.com