We wrote a post on why palm oil prices would outperformed soy oil prices in the short to medium-term on 24 August 2024. (https://klse.i3investor.com/web/blog/detail/thealphatrader/2024-08-24-story-h-153325157-WHY_PALM_OIL_PRICES_HAVE_OUTPERFORMED_SOYOIL_PRICES) and why the trend should continue. Since then, crude palm oil (CPO) prices have gone up 23%, while soy oil has appreciated by only 10%. As we predicted, the discount between CPO and soy oil has now turned into a premium. (Current premium is around USD80 per tonne versus a discount of USD20 per tonne two months ago)

Well done to those who managed to capitalise on this excellent trade! (A long CPO short soy oil pair trade). For the benefit of those who are not familiar with trading derivatives, a pair trade or spread trade can be structured as an inter commodity trade (the same calendar month of two different commodities) or intra commodity (two different calendar months of a similar commodity). As long as there is outperformance between the pair, a profit is made. One big advantage of initiating a pair trade versus an outright trade is that we do not have to be perfect on the timing of the trade. As market watchers will tell you, timing the market is the one and most difficult endeavour to master. Understanding the fundamentals and catalysts of the 2 underlying products in the pair trade is the key to a successful pair trade.

WILL THE OUTPERFORMANCE TREND PERSIST?

- With Indonesia’s aggressive rollout of biodiesel policies already in motion, it is going to put a competitive edge that palm oil has over competing vegetable oils. The mix of palm-based fuels with diesel is set to increase to 50% from the current 35%.

- The impending results of the US election will also have a bearing on the direction of the premium that CPO has over soy oil. A trump victory will be positive for the expansion of premium.

-  With CPO entering the low production months soon and weather problems around growing regions lately also may contribute to the current bullish sentiment in CPO price to continue.

CONCLUSION

Given the big jump in the spread recently, we are inclined to take some off the table while keeping the rest for more potential upside. With the impending US elections being priced as too close to call, it would seem prudent to lock in some gains in the face of uncertainly. As of time of writing, it should be noted that most analysts have yet to upgrade their projections to take into account of the recent CPO price rise. Perhaps it may be time to load ups on some plantation stocks too? 

Disclaimer: This blog is created for sharing of trading ideas only. It is not in any way or form meant to be an inducement or recommendation to buy or sell any stocks. Consult your financial consultant before making any financial investments.