Malaysia plans to launch a new palm oil futures contract in the third quarter, allowing traders in the nation’s two largest palm producing states greater price discovery and a viable option for physical delivery.
The Bursa Malaysia Derivatives Exchange manages Malaysia’s crude palm oil futures contract (FCPO), which sets the global price benchmark for the world’s cheapest and most widely used edible oil.
“The (new) contract mirrors most of the FCPO specifications, with enhancements made to benefit Sabah and Sarawak palm oil players,” said Samuel Ho, CEO of Bursa Malaysia Derivatives.
Located on the island of Borneo, Sabah and Sarawak contribute 45% of Malaysia’s crude palm oil production.
Malaysia is the world’s second-largest palm oil producer and exporter after Indonesia.
Palm oil traders in the two states said the current palm oil contract puts them at a disadvantage – Sabah and Sarawak crude palm oil is typically sold at a discount to spot prices in peninsular Malaysia, while freight costs are higher as the designated delivery points are also in the peninsula. This makes physical delivery unfeasible.
The new contract – the East Malaysian Palm Oil Futures (FEPO) – will cater for physical deliveries in Sabah and Sarawak through three designated ports, Ho said.
The contract also provides greater price discovery to the Sabah and Sarawak market and an avenue for traders to hedge their price risks, he added.
FEPO will start trading earlier at 9am to coincide with Chinese trading hours, Ho said. The current FCPO contract starts trading at 10:30am
Andrew Cheng, chief executive of the Sarawak Oil Palm Plantation Owners Association, said producers in the two states lose more than RM1bil (US$241.7mil) a year due to the price difference and that the new contract can eliminate that.
Based on Malaysian Palm Oil Board data, Sarawak’s crude palm oil price had been trading at a discount ranging between RM13 and RM198 a tone during January 2020 to April 2021, he said.
“It will allow us to fetch a better price, and with the savings we can expand the downstream industry in Sarawak to be fully-integrated and mature,” he added.