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CPO To Buy or Sell? Shifting Risk in CPO Business through Hedging

by JUSTIN YAP

  

KUCHING – May 16, 2011 – The plantation industry and its related players could shift the risks in crude palm oil (CPO) business through hedging by making full use of the price fluctuation opportunities in the market despite it going up or down on the trading board.

CPO volume in Malaysia was not as big as in Indonesia given that the country of a thousand faces was still the number one producer and exporter of the product, said Acute Precision and Studies Research Inc (APSRI) chief executive officer and master consultant Dar Wong.

CPO to buy or sell? Shifting risk in CPO business through hedging

He was speaking at the recently held by invitation only talk on ‘Shifting your risk in CPO business through hedging’, organised by Oriental Pacific Futures Sdn Bhd.

However, in terms of quality, he pointed out that Malaysian CPO quality was definitely the best in the world. “But unfortunately, it has not received sufficient exposure as well as education and most people did not realise how important hedging is for their companies.

“Hedging will minimise risk in the fluctuation of prices during uncertain periods. If the operating business revenue is more than RM300,000 a year, there is definitely a need to hedge to avoid huge losses in commodity value versus currency value,” he added. “Long term appreciation was profitable provided manufacturing cost was well maintained.”

On the financial front, Wong noted that the market was going to move in sideways correction between US$95 and US$100 for the next one to two months given that the US continued to experience financial issues at the moment. “Last November, when the US printed US$600 billion and pumped into the financial system, it caused the value of the US dollar to drop and in return, commodity prices started to move up.”

“Now, the US is talking about printing more money to sustain it for another three to six months. In June, if it manages to get the green light for another round of printing US dollars, oil prices and gold prices will move up along with it,” he revealed.

Meanwhile, as for CPO prices, Wong opined that the economy would cause it to move between RM3,250 to RM3,350 per tonne. In the next few months, if the crude oil price broke the RM3,350 support level, industry players should be able to see it reaching the target of RM3,520, which was likely to happen in September or October.

“Hedging can recoup a lot of losses if proper steps are taken and to take even greater chances, players can make full use of the market, which will be going up in the next three months,” he urged. “First, you must determine your trade side, whether are you going to buy or sell.”

Physical CPO sellers should buy futures and for physical CPO purchasers, they should sell futures. “Step two will be – determine your trade details by rounding off your commercial volume to total futures contracts size (25 metric tonne per contract) so it would be easier to manage.”

On the other hand, he also warned online trading players to place a two per cent cut loss point (stop level). “If the market triggers your two per cent losses, this indicates you do not need hedging anymore unless there is a third condition plan which will need more research,” Wong pointed out.

On the economic front, Wong stressed that if the middle east civil unrest spread, the players would see crude oil prices reaching as high as US$130 to US$140 per barrel again by end of this year. “If the economy settles down to normal growth with no disasters, moderate inflation, peace in the Arab regions, we should expect crude oil prices at US$80 to US$90 per barrel.

He urged CPO players in the industry to forecast carefully for the next three to six months. Players could check the correlation of WTI Crude versus CPO during 2008 financial crisis. “CPO prices have always moved faster and ahead of WTI Crude. If you know how to look at it, you will know where WTI Crude is going.”

By studying all the given factors and based on a robust fundamental backdrop, Wong predicted that after sometime in June or July, CPO prices will start to turn up followed by WTI Crude. He pointed out that WTI Crude traders could use this chance to enhance their gains, by just following CPO prices,

“Hedging is not a guarantee to zero your risk but hedging is taking a calculated risk to recoup or minimise your intangible business losses. It turns intangible losses into profits or may incur small losses by preventing excessive value changes,” he concluded.

Source: The Borneo Post

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About Oriental Pacific Futures
Oriental Pacific Futures is a Malaysia-based brokerage authorized to provide futures broking services to institution and private clients since 2007. Oriental Pacific Futures is a registered trading participant of Bursa Malaysia Derivatives Berhad and licensed clearing member of the Bursa Malaysia Derivatives Clearing Berhad. OPF specializes in futures broking, particularly Crude Palm Oil futures (FCPO) traded on Bursa Malaysia Kuala Lumpur. In 2010, OPF was one of the nine Malaysian futures brokers to receive recognition by the National Futures Association to solicit and accept orders and customer funds directly from US customers as permitted by the United States Commodity Futures Trading Commission through the Chicago Mercantile Exchange. Visit http://www.opf.com.my