CME’s Dollar Palm Oil Futures May Lure Europe, U.S. Investors

May 24 (Bloomberg) -- A dollar-denominated palm oil contract introduced by CME Group Inc., the largest futures exchange, may attract U.S. and European investors, according to Dorab Mistry, a director at Godrej International Ltd.

The contract was scheduled to start trading today at 6 a.m. Kuala Lumpur time, with final cash settlement prices based on the ringgit-denominated futures on Bursa Malaysia Bhd.

About 90 percent of the world’s palm oil, used in fuel and cooking, is produced in Indonesia and Malaysia, and the commodity is the cheapest and most traded cooking oil. Futures in Kuala Lumpur, the global benchmark, surged 57 percent last year on demand from China and India, the biggest consumers. Soybean oil in Chicago advanced 21 percent.

“The main players are likely to be U.S. and European consumers and investors who are not comfortable trading a ringgit contract,” said Dorab Mistry from Godrej, one of India’s largest traders of cooking oils.

While local traders in Malaysia and Indonesia “may not be significant” participants, “refiners who export in dollars and crude palm oil shippers who export will find it an attractive hedge,” he said May 18. “It’s an ideal arbitrage instrument for the palm-soya spread,” he said.

A stronger ringgit narrowed the premium of soybean oil over palm oil to as low as $54.94 a ton on April 30, from a 12-month average of $128.97 a ton, according to Bloomberg data.

‘Added Liquidity’

While dollar-denominated futures “should give some added liquidity” to the ringgit contract, traders in Indonesia and Malaysia already have “quite a good future to trade,” said Scott Briggs, agricultural commodities strategist at Australia & New Zealand Banking Group Ltd. “They have achieved a market of this size, so why would they start trading more.”

“Food processors, commercial firms and other multinational companies who use crude palm oil and trade in U.S. currency now have an alternative for hedging that risk,” Timothy Andriesen, CME’s managing director for commodities, said March 9.

The Indonesian rupiah climbed 12 percent against the dollar in the past year, outpacing an advance of 6.4 percent in the ringgit, Bloomberg data tracking currency performance show.

The CME contract “definitely increases the visibility of palm oil as a commodity and we could see increased sensitivity of crude palm oil to other commodities,” said Arhnue Tan, a senior analyst at ECM Libra Capital Sdn. Trading will typically be low for a new contract, Tan said.

The tie-up between CME Group and Bursa Malaysia, which also manages the nation’s stock exchange, was announced in September.

In August last year, CME Group Chief Executive Officer Craig Donohue said he sees opportunities for further tie-ups in emerging markets as economic growth drives business. The CME bought its rival Chicago Board of Trade in 2007.