Oct 8 / Ignacio Espinola

Palm Oil Market Update

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*    Palm Oil prices have been going up nonstop over the last months.

*    The EUDR presents a new treat to the palm oil commerce.

*    Indonesia’s new objective, implement B40.



Current Scenario

Palm oil prices have been increasing over the last months.

The main driver for the increase on palm oil prices comes from the appreciation of the Malaysian ringgit versus the USD. Asian currencies have been having a very good year mostly due to two reasons: The first one is the comparison between current and last year levels. Asian currencies have devaluated a lot over the last 2 years which means than after that, any positive change is remarked more when we compare it to the recent history. The other reason comes from the US interest rates which has weakened the USD versus every other currency.

Also, there are some concerns regarding new policies in the EU, a new legislation in Indonesia and the recent Middle East conflict. Let’s find out more about it.


Asia – Forex valuation (a.a., %)

Source: Refinitiv

Supply and Demand

When we look at the supply and demand for palm oil for next crop, we do not see major changes year over year. There will be some adjustments in production, but they are going to be small. For example, Malaysia will have a better yield number this next crop but that will be offset by the area harvested, leaving no big changes in terms of production.

When we check the world numbers, we can see that the overall production will be very similar to the previous crop, as well as the other variables. We can say that the reason why the prices are moving is not in the supply and demand balance, but somewhere else.

Crop Calendar

Source: USDA - Hedgepoint

Indonesia’s B40 and Europe’s EUDR legislation

Indonesia’s government will implement a new program, B40, which will substitute the current B35 in 2025. The B40 program will increase the palm oil content in the biodiesel blend formula from 35% to 40%. This will reduce the availability of palm oil for other uses which will increase the demand.

So far, the government has only tested this new blend on trains, but it does seem that it is going to work well.

Regarding the EUDR legislation, the European Union Deforestation Regulation (EUDR) requires companies to ensure their products are not linked to deforestation, particularly in the production of commodities.

The actual prospect was supposed to be released on the 30 of December of 2024 and it was going to affect different commodities such as, palm oil, coffee, cocoa, soy, cattle, timber and rubber.

Last week, Europe’s decided to delay the program for one more year, especially due to the influence of Germany and Sweden.

The EUDR legislation demands that this commodities mentioned before have to have two things to enter the EU:

*          Deforestation-free (FAO/EUDR forest definition);
*          Legal (produced in accordance with the relevant legislation of the country of production).

This new legislation was followed closely by many countries. In Asia, the concern was being followed closely by the palm oil producers because it was going to put pressure on the market prices and it was going to generate different issues, from export papers to farmer traceability. Luckily for them, the legislation has been postponed for one more year so we will have to wait and see what happens.

Are countries going to start building palm oil stocks in Europe? Are prices going to go down after this new due to the release of some pressure? We will have to wait a few more weeks to see what happens with palm oil.

Conclusion

In conclusion, recent events have pushed the palm oil prices up. Ringgit appreciation, fear of new Europe legislations and the new Indonesian mandate where bullish factors that were playing in the market. We have to wait a few weeks and see how the palm reacts to the news about the delay on the EUDR legislation and clearly the Israel-Arab countries conflict too, which is going to affect all the markets if this situation continues for more time.

Palm Oil Prices from Malaysia Bursa Exchange (USD/Mt)

Source: Reuters – USDA - Hedgepoint


Written by Ignacio Espinola
ignacio.espinola@hedgepointglobal.com
Reviewed by Thais Italiani
Thais.Italiani@hedgepointglobal.com
www.hedgepointglobal.com

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