Forecasting Crude Palm Oil (CPO) price

You can see CPO price in Malaysia here and Indonesia price here.
Current CPO price is RM 2156/t.

Predicting commodity price is very difficult. We can always write down a long list of drivers that support the price or cut the price. This is the most common topic in analyst reports. Every analyst will forecast CPO price as it’s the most important driver to earnings. How have the analysts performed in forecasting the CPO price?

2012: I started covering this sector in mid 2012. CPO price was around RM 3000/t and facing downtrend. Most sell-side analysts were forecasting that the CPO price would bounce back from this downtrend. Come September, CPO price fell sharply to below RM 2500/t. Bounced slightly in following weeks before falling to RM 2200/t. Analysts started to get pessimistic, but still thought Rm 2200/t too low. CPO price bounced to Rm 2300-2400/t before closing the year in the range RM 2000-2100/t. Analysts got even more pessimistic this time. Downgraded their price forecast all the way from above RM 3000/t to mid 2000/t.

2013: Price was in the range RM 2200-2400 for first half of the year. Analysts lowered their forecast to this range. In last quarter of 2013, Indonesia government came out with biodiesel mandate that supported CPO price. The price started climbing to RM 2600/t. No analysts that I knew of forecast this rally. Slowly, they upgraded their price forecast.

2014: For first half of 2014, price was in the range RM 2500-2700/t. Most analysts have their price forecast in this range. In August, the price started falling, to even below RM 2000/t for a short period before bouncing back and fluctuated in the range RM 2100-2300/t. That decline caught many analysts off guard. They started downgrading their price forecast to be in lower range.

2015: Price has been in the range RM 2100-2300 for most part of the first 4 months. Analysts have been forecasting RM 2300-2400/t for this year average.

 CPO Price 2011-2015

source: http://www.mpob.com.my

In each year, there were different factors that affect the CPO price. The drivers could be lower demand (differ by countries), lower supplier (weather problem or natural tree productivity cycle), El Nino (bad weather) forecast (which didn’t materialize), new government regulation, disappointment over the execution of government regulation, palm oil refinery oversupply, other edible oil prices that fell substantially (soybean oil, in particular, is considered a substitute to palm oil), excessive soybean supply, import tax/duty, macro economics, falling crude oil price (linkage through biodiesel), fluctuating currency affecting demand or cost, speculation on the commodity itself, etc.

The above miss-forecast is not to inform you that these analysts are bad. I know some of them and speak to them often. They are smart and nice people. They write good and detail reports. They are on top of the latest development in the sector. They also have wide industry contacts and keep close contact with the palm oil companies’ IR and management.

The problem is forecasting commodity price is a very tough game to beat. In a fluctuating environment, forecasting commodity price is like forecasting where the stock market is going, and we know that even the best analyst/economist can get it wrong almost half the time. Forecasting stock market is harder than forecasting commodity because the former has much more variables. But the latter also have many variables changing at the same time. Even if the analyst understands the supply and demand of palm oil very well, he/she may not have foresight on changing weather (too much or too little rain), new government regulation, changes in other edible oil sector that make palm oil less or more favorable, speculative nature of the market, and other unforeseen factors.

When I attended the Palm Oil Conference in Malaysia in March 2014, so many people were waiting and taking notes of what those “industry experts” said. These experts’ forecast would be published immediately on news portal as flash news with more details to follow. Never mind how accurate their previous forecast was. For one expert, in the past, he had forecast CPO price of RM 4000/t, and missed big time as CPO price fell to below RM 3000/t and never climbed back above RM 3000/t anymore. Never mind. Next year, he gave a new forecast, which was below RM 3000/t. During that conference in 2014, he forecast average CPO price of RM 2600/t for 2014 with some condition on weather (El Nino risk), which could push the price further up. CPO price turned out to average about RM 2400/t for full year. Another miss. He had also missed the price in 2013 but I couldn’t remember his forecast. Other experts didn’t do any better.

Note that I’m not trying to degrade them. The experts have decades of experience in palm oil market. Their experience and expertise do carry more weight than yours and mine. Forecast wise, they can justify better with their reasoning and insight. I also made my forecast, and you know that it’s a miss. What I’m trying to highlight is not how bad these analysts/experts are in forecasting. But that forecasting is a game with small chance of consistent success. There are many unforeseen factors that can affect the prices in next 12 months. Speculation (greed or fear) can also shift the price. Analysts are forced to forecast the commodity price for next 3 years to make estimates on Income Statement in their reports. By now, we know that forecasting one year is already difficult enough, and they have to forecast for 3 years?? (and sometimes even more!)

That’s forecast for palm oil price. Now, if some experts forecast stock market movement, you can amplify the difficulty. On top of those variables that are applicable to palm oil, other more challenging variables can be thrown in: forex fluctuation, domestic economic development, export countries economic development, each industry’s growth/risk, monetary and fiscal policy, other commodity price (crude oil is a big one), market speculation, etc, etc. Some economists develop Excel spreadsheet to keep track of all the variables he could think of, and the Excel file is so large and complicated that it could crash the computer. Each variable above could demand an expert to take years to develop good understanding, and now you want another expert to be on top of everything to forecast stock market?

As Benjamin Graham said
in the short run, the market is like voting machine, but in the long run, the market is like a weighing machine

So, forecasting for next 1 or 2 years is similar to flipping coin. We can always provide good justification like those experts do (just quote their reasonings), but as repeatedly shown in history, the success rate is not high.

So, what’s palm oil price forecast for 2015?

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