The massive El Niño we wrote about in our Big Move Trade Alert last July may be fading but its effects will continue to be felt for months. El Niño is a tropical phenomenon, so it is not surprising that its biggest impact tends to be on crops grown in the tropics. For example, January and February were the driest months in 30 years for the sugar-growing regions of the world’s largest producer, Brazil.
Prices have responded accordingly, soaring over 50% since August. Our price target remains 20 cents per pound. If you purchased more than one of the March 2017 call options we recommended buying for $950 or less in the Alert referenced above, you can sell half today and take the remaining risk on your position off the table.
The tropical commodity we want to focus on now is palm oil. Palm oil is an essential ingredient in many of the products we use every day like shampoo, lipstick, margarine and ice cream. It is also used for cooking in much of Asia, including the population-heavy nations of India and China — the biggest consumers of palm oil. Palm oil is also used to make bio-diesel.
Palm oil production has doubled in the past 10 years but it is barely keeping pace with growing demand, which is on track to double again by 2050. Global imports have skyrocketed 485%. Big demand means rogue palm oil production is threatening huge swaths of carbon-eating rainforest. In fact, so much indigenous jungle is being replaced by row after row of oil-producing palms that palm oil production has become a huge environmental crisis as well as a big setback for global carbon reduction efforts.
Dry Conditions Affecting Supply
Palm oil prices weakened last year in response to new supply and a slowing Chinese economy. This year, however, is a different story. The same El Niño weather phenomenon responsible for the storms now pounding the west coast of North America is also responsible for drought-like conditions on the other side of the Pacific that are beginning to cut into palm oil supply.
Indonesia and Malaysia are responsible for up to 90% of global production. Malaysian exports are expected to drop 14%, according to a Reuters survey of nine planters, traders and analysts. Inventories have fallen to new lows for the year and output has dropped to lows not seen since 2011. Prices are starting to stabilize. We think they have the potential of heading much higher as the market begins pricing in more damage from dry weather.
Source: Index Mundi
The chart above shows the price of palm oil going back to 2006. Palm oil futures trade in Malaysia and are denominated in Malaysian ringgit, making it difficult to trade from North America. Fortunately, soybean oil is easy-to-trade and as the chart below illustrates, tracks the price of palm oil very well.
Data Source: Reuters / E-signal
The palm oil market is 6 to 7 times larger than the soy oil market but since the latter can be substituted for the former in many applications, they tend to move in lockstep. Concerns about palm oil supply going forward is one of the reasons why soybean oil has been the best performer of the soybean complex, even though there are plenty of soybeans to go around. Indians and Chinese in cooler climates substitute soybean oil for palm oil in the winter because the latter becomes viscous and harder to handle when the temperature drops. As the price of palm oil rises, consumers will shift to soybean oil, driving up the price of it as well.
What To Do Now
Volatility in the soybean oil market is currently low. That means relatively close-to-the-money call options can be picked up on the cheap. We are currently asking our trading customers to consider paying roughly $600 for December soy oil calls that could be worth as much as $3,600 should the December soybean oil contract climb to our target of 41 cents per pound prior to option expiration on November 25, 2016.
Data Source: Reuters / E-signal
The chart above shows a market that, while still moving sideways, seems to be bottoming. A series of weekly closes above the nearly 4-year long downtrend line and the 38-week moving average (dark blue line) could be a signal that the tide is turning in favor of the bulls. Our target is 41 cents per pound which is also a Fibonacci-perfect 161.8% reversal of the last leg down.
Getting Started
You need a futures account to trade the recommendations in this report. The RMB Group has been helping investors trade futures and options since 1984 and are very familiar with all long-term Big Move Trade strategies. Call us toll-free at 800-345-7026 or 312-373-4970 direct to learn more. We’ll send you everything you need to get started. You can also visit www.rmbgroup.com to open an account online.
If you are new to futures and options and want to learn more, download the RMB Short Course in Futures and Options. This easy-to-read guide covers all the basics. Call us toll-free at 800-345-7026 or 312-373-4970 direct for your free copy or go to our website at www.rmbgroup.com. Click the “Education Tools” tab at the top of the home page, scroll down to find the report, then click on it.
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The RMB Group
222 South Riverside Plaza, Suite 1200, Chicago, IL 60606
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