Palm Oil Players Should Hedge, Diversify Downstream -- Economist

By Abdul Hamid A Rahman

KUALA LUMPUR, June 24 (Bernama) -- Malaysian palm oil producers must intensify hedging efforts and expand downstream to mitigate the risk of sudden price volatility, said Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid.

He was responding to reports of Indian refiners cancelling orders for 65,000 metric tonnes of crude palm oil (CPO) for July to September deliveries amid a recent surge in benchmark prices.

Mohd Afzanizam said that in the face of increasing market volatility, palm oil producers should adopt proactive risk management tools to safeguard their income streams. 

One of the most effective strategies, he noted, is the use of financial instruments such as derivatives.

“By participating in the Bursa Malaysia futures market, producers can hedge against unfavourable price movements. 

“This allows them to lock in selling prices for future deliveries, thereby reducing exposure to sharp fluctuations in the global palm oil market and providing greater financial predictability,” he told Bernama.

Such hedging mechanisms, he said, are not merely speculative tools but essential components of a sound financial strategy. 

“They enable producers to plan better, protect their margins, and maintain stability in operations, even during periods of price turbulence,” he explained.

He said that the cancellations by Indian buyers, who account for 17.9 per cent of Malaysia’s total palm oil exports, have amplified concerns over the industry's over-reliance on a single major market.

“This development highlights the urgency for Malaysia to diversify its export base and explore untapped or underutilised markets to cushion against similar shocks in the future,” he said.

The other top five destinations are China, which currently takes up 8.2 per cent of Malaysia’s palm oil exports, followed by the European Union (7.7 per cent), Kenya (7.5 per cent), and Turkiye (5.4 per cent).

“Strengthening trade ties with these markets and expanding our footprint within them would be a logical and relatively accessible step -- a low-hanging fruit -- for Malaysia, especially in the current environment where resilience and adaptability are critical,” he said.

Mohd Afzanizam said that further integration into downstream activities such as oleochemicals and biodiesel could help stabilise earnings by ensuring steady demand from industrial users.

Better Inventory and Logistics Planning

On improving supply chain resilience, he proposed that key stakeholders, including producers, refiners, and government agencies collaborate through shared digital platforms that provide real-time supply and demand data.

“This would support better inventory and logistics planning, including optimising replanting timelines.

“To foster long-term market stability, a comprehensive replanting strategy is essential. As oil palm trees typically require three to four years before yielding fruit, a well-planned replanting cycle would help regulate supply and reduce extreme price fluctuations.

“Supply-side discipline via structured replanting could provide the market with signals on production trends, allowing price adjustments to occur in a more orderly fashion,” he said.

He also highlighted the importance of adopting precision agriculture technologies such as satellite imaging and drone surveillance, which would improve crop yield, reduce inefficiencies, and ultimately enhance cost management.

In addition, he encouraged joint research and development initiatives with universities and research institutions, particularly in the areas of yield improvement, zero-waste technologies, and carbon capture.

“These innovations would enhance sustainability while strengthening Malaysia’s position in the global palm oil supply chain,” he added.

Meanwhile,  Associate Professor Dr Amirul Afif Muhamat from Universiti Teknologi MARA’s (UiTM) Faculty of Business and Management said that while a surge in palm oil prices benefits smallholders and large plantation companies, the sudden spike can be too drastic for importers.

“I believe the actions taken by Indian importers were anticipated by players and authorities in the palm oil industry. That said, I expect this situation to be temporary, as prices are likely to return to normal range. Consequently, demand should stabilise as well,” he told Bernama.

In addition, he said that the government, through agencies such as the Malaysian Palm Oil Board and Malaysian Palm Oil Council, as well as the Ministry of Investment, Trade and Industry and the Ministry of Plantation and Commodities, will continue to actively explore new export markets. 

“Countries like Uzbekistan and several in the Middle East have shown strong interest,” he noted.

He said that high palm oil prices generally reflect confidence in the commodity and translate to improved earnings for oil palm cultivators. 

“Nevertheless, sudden disruptions are undesirable for any market participant. 

“This is why financial risk management tools, especially derivatives, are essential, and managing the supply chain is also central to stabilising prices," he added.

-- BERNAMA