Commodity Palm Oil - Everything you need to know about Palm Oil

Palm oil is an editable oil, derived from the mesocarp of the fruit the oil palm. Palm oil is a light yellow liquid or semi-solid substance while at room temperature. It becomes clear yellow upon heating the oil. This type of oil is commonly used in food preparation in the tropical belt of Africa, Asia and parts of Brazil. The oil is also becoming increasingly popular in major food-production industries, such as instant noodles and snack foods. It is currently the most traded vegetable oil in the world.


The oil palm or Elaeis Guineensis has originated in West-Africa, there are also early traces of palm oil in East-Africa and ancient Egypt. The oil was used extensively as a cooking oil by the people in these areas of Africa. With the arrival of European merchants on the African west coast, the palm oil was brought back to Europe. However due to the bulky size of original palm oil and high price, this commodity remained exclusive in Europe. During the colonization of various continents, the Europeans started exporting the palm oil trees to their Asian colonies and set-up huge plantations. The most notable plantation emerged in British Malaya (currently Malaysia) and Dutch Java (currently Indonesia). These plantation were created to sustain the rapid increase of industrialization, as palm oil was a critical substance for operation their machines. To this day Indonesia and Malaysia remain the biggest producers of palm oil.

Production of Palm Oil

The production of palm oil is comprised of a number of steps. Technological advancements have influenced the various steps of the production process and increased the effectiveness. The following steps can be identified: receive the fruit bunches from a plantation, sterilizing and threshing of the bunches, mashing the fruits in order to extract the palm oil. Afterwards a number of actions are taken in order to purify the oil and prepare it for storage.

Sterilizing and Threshing

Upon receiving the fruit bunches, the fruit is embedded in spikelets on a main stem. Removing the spikelet from the stem can be either done by hand or by machine. Machines are obviously a more efficient method as they can process large quantities at a higher speed them manual labor. A threshing machine is a large drum whit rotary beaters which remove the fruit from the spikelet, but leave the spikelet on the stem.
The fruits will afterwards be cooked or steamed in order to sterilize the product. The choice for cooking or steaming is based on the size of the processor. Small units will cook the fruits as they are not capable of generating steam. Large enough units will employ steam for the sterilization of the fruits. The empty bunches will be either used as fuel for the cooking of the fruits or are processed into fertilizers and be sold back to the plantations.


The next step in the production process is the extraction of the oil from the fruit. The fruits are placed in a round metal cage, whit a heavy plunger on top of it. This plunger will be used to crush the fruit and thereby extract the oil through pressure force. The plunger will be either operated on a screw thread or operate on a hydraulic system. The pressure of the plunger will be increased in steps in order to allow the oil to escape. The oil is gathered in a container beneath the cage.

The fluid gathered from the crushing is not yet purely palm oil. There is still water and cell debris in mixed with the oil. This mixture is quite thick so hot water will be added in order to thin the substance. This subsequently forces the oil (which is lighter than water) to float to the top of the water and other elements will drop to the bottom. The oil is then collected in a reservoir where it is once again cooked in order to further remove the remnants of water. This results in palm oil which will be ready for storage.


There are a number of factors which impact the quality of palm oil during storage. These factors are light, oxygen, moisture and heat. In order to maintain a the quality of palm oil during storage these elements must be properly managed. Crude palm oil is stored in steel tanks at a temperature between 88 and 105 Fahrenheit. This temperature is required in order to prevent solidification and fractionation. During filling and draining of the storage tanks, the temperature will be increased above the 105 Fahrenheit. The storage tank will never be completely filled, because the headspace is filled with CO2 to prevent oxidation. The maximum storage period of palm oil is six months. After a six month period the palm oil has an increased chance to turn sour and the acid level of the oil will rise to unacceptable heights.


The most common use of palm oil is in the food industry. In the food industry, palm oil serves a number of different purposes, the most notably is as frying and/or cooking oil. A distinction can be made between domestic use and industrial use. Large factories use palm oil in order to cook their noodles, potato chips and many other products. Palm oil is used domestically primarily as a vegetable oil in salads and as a frying oil.
The largest non-edible consumer of palm oil is the soap industry. Palm oil soaps are usually of high quality and are found all over the world. Specifically the perfume of palm oil soap is of higher quality than its counterparts.
Palm oil is a main component in the creation of biofuels. Similar to other vegetable oils, the demand for biofuels is growing rapidly. The challenge for manufacturers is to find a balance between the biofuels and food production. Both industries are demanding larger quantities which the producers cannot meet. This result in discussion about which industry to prioritize.

Trading of the commodity Palm Oil

Palm oil is being traded as a commodity on the Bursa Malaysia in Kuala Lumpur, Malaysia . Traders from all over the world can buy and sell Palm Oil Future Contracts and Options in order to protect themselves against price fluctuations. There are also numerous speculators active on the exchange who only trade for possible profits. The price of Crude Palm Oil Futures (FCPO) on this exchange functions as a benchmark for the global price of palm oil futures. Furthermore the prices of FCPO also serve as a reference point for pricing of other oils and fats industries.

Price Factors

An important price factor is the increasing demand for palm-oil. Global demand for palm oil is rising at a far more rapid pace than the production capacity of leading producers Indonesia and Malaysia. The rising demand is caused by the food and biofuels industries. Furthermore the physical limitations of available land for the plantations is limiting the production capacity. These factors will result in a higher palm oil shortage and subsequently will move manufacturers to look for alternatives.

The weather is a critical element in the creation of a price for palm oil. The major plantations are located in Malaysia and Indonesia. In this tropical climate there is a reasonable risk for extreme rainfall, which can significantly impact the quality and size of the harvest. In these types of situation the price will show a sharp rise due to the supply shortage.

Substitutions can play a considerable role in the realization of palm oil prices. Similar products like soy and corn oil can be used as a substitution for palm oil. If these commodities can be purchased at a more favorable price, this will decrease the demand for palm oil. Monitoring the prices of substitutes can therefore prove an important part in predicting upcoming prices for palm oil.

Biofuels are partially responsible for the price creating of palm oil. In western countries the demand for green fuels is becoming more prominent. Palm oil is an integral ingredient in the creation of biofuels and therefore its demand will increase significantly. The correlation between biofuels and palm oil is therefore quite strong.

Palm Oil Futures Contract (FCPO)

The Palm Oil Futures Contract on the Bursa Malaysia has the following specifics:

Product Symbol FCPO
Contract Size 25 metric tons
Contract Months Spot month and the next 5 succeeding months, and thereafter, alternate months up to 24 months ahead
Tick Size RM1 per metric ton