The crude palm oil contract in Commex currently sets the world's benchmark prices for palm oil and its product. International traders look upon Commex for price guidance and discovery and use it to price their contracts either with their suppliers or customers alike. This is not limited to just palm oil produced in Malaysia but the other major palm oil producing countries look upon Commex confidently to set their price direction and marketing strategy. Likewise major consumer countries also look upon Commex for price direction to set their purchasing decisions. It would indeed be advantageous if the two exchanges can complement each other for the benefit of the palm oil world.

The two futures exchanges on the BOOE and the Commex are trading in two different grades of palm oil. On the BOOE, the refined, bleached and deodorised palm olein is proposed to be traded. One is in the raw form - crude palm oil (CPO) on the Commex - while on the other is the finished derivative ready for distribution and consumption - RBD.

Prices of both products will reflect on the geographical supply and demand ledger relative to its local and domestic conditions prevailing at the time of the trading. Export duty from Malaysia for its crude palm oil and the competitiveness of RBD olein shipments into India from Malaysia and other palm oil producing countries are factors that will determine market levels at the BOOE.

Likewise import duties governing not only for RBD olein into India but for CPO and the other competing vegetable oils will create a measure of volatility for prices traded at the exchange. All these will provide various trading opportunities for traders in these two markets that will reflect actual market trading conditions.

At the Commex we would like to highlight the various trading opportunities out of the two exchanges especially when the RBD olein contract is launched and is traded actively at the BOOE. Traders and merchants can take advantage of hedging between one commodity and other on a given spread. Example of this is buying CPO futures on the Commex and selling RBD olein on the BOOE against it. This can be an advantageous venture especially if the CPO futures are considered cheap when there are good refining margins in Malaysia. Arbitrageurs will ensure that the two spreads will not diverge too far as shippers and merchants will fill the premium being asked for in the BOOE. As a result of this, there will be closer corelation between the two futures markets as far as prices are concerned.

Regular shippers of RBD olein into India can use the RBD olein contract at the BOOE as a pricing mechanism with their receivers in India. This will involve the shipper of the physical RBD olein exchanging with the end receiver in India, RBD olein futures contract at the BOOE.

As an example, a shipper sells 1,000 mt of RBD olein C&F Mumbai to buyer in India. In exchange, the buyer sells 100 contracts or 1,000 mt RBD olein contract at the BOOE to the shipper. Let's say they set a basis premium/discount of US $X per metric tonne over the futures contract. Before the vessel's arrival , the shipper who is now long BOOE RBD olein contracts can decide to sell his futures position at the BOOE and cash out his profit if any. The buyer who is now long physical and short futures can then decide to unwind piecemeal or whole whenever he resells his physical cargo to his end buyer. At each time he sells his physical cargo he buys back his short position from the BOOE to unwind from the spread.

At the same time these shippers can also use the CPO contracts at the COMMEX to price their RBD olein purchases with their suppliers out of Malaysia on the same basis as cash to futures spread.

It is also possible that the shipper has initiated a short position at the BOOE even before exchanging with the end receiver in India in anticipation of lower prices to come. Once the exchange has been completed the shipper just squares his short at the BOOE with the position that has been exchanged from the end receiver. The end receiver in India in reverse can also take that strategy.

The advantage with these arrangements is that you do not have to worry about haggling over the price and deciding whether to sell and ship or not. Here you can let your futures position decide how you view the market direction and get on with your shipping programme.

Thus, we can foresee several possibilities with these two futures exchanges in times to come. We hope more uses can come out with the innovative and rational utilization of these contracts as it matures in time.

From the author's address to the participants at a seminar organised by the Bombay Oilseeds and Oils Exchange in Mumbai on June 21