With palm oil price rising to the highest on record, many observers are excited about the profit opportunity it offers. From supply chain bottleneck to Ukraine Invasion, the list of factors supporting palm oil prices are plentiful. So being an enterprising trader, knowing the direction of an asset is one thing, knowing how to get exposure to the asset is another. In this article, we cover the best way to gain exposure to the recent palm oil price bull run

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Two Main Ways to Gain Exposure to Palm Oil Prices

Based in Malaysia & having access to Bursa Malaysia offers you more options to gain exposure to palm oil prices as Malaysia is the second largest palm oil producer globally. Two of the most commonly ways to gain exposure to palm oil prices are (i) Palm Oil Futures (FCPO) (ii) investing in palm oil stocks in Malaysia.

Futures vs Palm Oil Stocks

Getting price exposure through FCPO offers you a direct and clean exposure to palm oil prices. Your profit & loss is almost 100% explained by the changes in palm oil prices & you will not be exposed to the idiosyncratic risk of palm oil stocks. However, gaining exposure through FCPO is capital intensive. FCPO contract size is large and the initial margin is 10% to 13% of the notional value. Additionally, there is no spot contract for palm oil, hence your delivery is future-dated. So you will need to deal with occasional premium, in the case of contago, and discount, in the case of backwardation. Both of which may erode your profit.

For Palm oil stocks, the main disadvantage is that you do not have direct exposure to palm oil stocks. Investing in a stock carries idiosyncratic risks unique to it. So you may not have direct & full benefit from the rise of palm oil stocks. However, in this article we will express our preference for palm oil stocks & the reason behind it.

Why is Exposure through Palm Oil stocks preferred

Besides its flexible capital outlay, investing through palm oil stocks is advantageous because you stand to enjoy a double whammy if the company is able to increase production of palm oil while the oil price rises. You get to also enjoy more profits if the company is able to increase efficiency through cost reduction. Of course, if the company is poorly managed, its performance will be a drag, hence the idiosyncratic risk. As such, finding the right stock to gain exposure is important.

Criteria to determine the best palm oil stocks

Plantation Stocks Comparison Chart

*Change in % of profit for each % change in average CPO price

Best Stocks for Palm Oil Price Exposure

Based on the above comparison chart, the top 3 stocks that provides the best exposure to palm oil price are:

• Hap Seng Plantations Holdings Bhd (HSPLANT)
• IOI Corporation Bhd (IOICORP)
• Kuala Lumpur Kepong Bhd (KLK)