Crude Palm Oil (CPO) price has been hitting the headlines in recent days but not for the right reasons. We just witnessed one of the biggest single day drops in price on Wednesday(28th Sept) where the price dropped almost 9% in a single day, close to the daily limit down of 10% allowed by the derivatives exchange.

Recession Fears

The main reason for the drop and panic selling in not only CPO futures but commodity markets across the board is the fear of recession sparked by the aggressive rate hike by the Federal Reserve. The rate hikes are inevitable as the Fed is desperately trying to bring down inflation to its target rate of 2% and will do all that's necessary to get there. The 1970's style stagflation is coming back in full force and that has the risk of a long drawn recession if the right monetary policy is not implemented.

Weak Ringgit

In the  Asian Financial Crisis currency crisis back in 1997 saw the Ringgit from 2.5 to the dollar all the way down to 4.8. That actually was very beneficial to palm oil price which saw an impressive rise from RM800 to RM2400 in 6 months. This move was purely due to the currency depreciation. So will we see a repeat this time round? This is very possible as the discount of CPO price vs the soybean oil is trading at a historical high of USD650 per tonne (the historical average is about USD100)

Peak Production

CPO production typically peaks in September or October every year. However this year the end stocks are still on an uptrend mainly due to the flip flop policies in Indonesia on CPO exports. Now they seem to be aggressively dumping their CPO stocks and this has resulted in consensus that the peak in CPO stocks will likely only happen in December. If this is the case then do not expect the price to bottom till November or December.

Conclusion

Times of uncertainty and high volatility is frowned by most but it is a great time to speculate if done right. As i have wrote before about the importance of risk management in your investment strategies whether you are an investor or trader, it is equally important!