By Huileng Tan 

SINGAPORE---Interest in trading palm oil futures is growing beyond its traditional heartlands in southeast Asia, thanks both to growing consumption of the edible oil and the opportunities for traders to profit from the way prices often move in line with other commodities.

Foreign investors now account for around 40% of trading in Malaysian palm oil futures, from about 25% in 2010, according to Bursa Malaysia in an email.

Overall trade in Bursa's global benchmark crude palm oil futures hit 10 million lots in 2014--two-and-a-half times the level in 2010. In the first two months of this year alone, almost 2 million lots of Bursa CPO were traded.

Fast growth in demand for palm oil, used in thousands of products from cooking oil to biscuits, lipsticks and transport fuels, is one reason for the surge in trading interest. Both producers and consumers use derivatives to hedge their expected payments and receipts against unpredictable price swings.

According to the U.S. Department of Agriculture, global palm oil production grew by 20% from 2010 to 2014 as consumption rose at a similar pace, providing stiff competition for traditional edible oils made from soybeans and rapeseeds.

Using derivatives is especially useful at times of high price volatility such as that seen for palm oil recently.

Last year, the BMD crude palm-oil contract hit an 18-month high of 2,916 ringgit a ton in March before tumbling to a 5 1/2 -year low of 1,914 ringgit a ton in September. It then hit a six-month high in January this year due to concerns about floods hitting production, before falling back on slowing demand.

The futures rallied again last month after major producer and user Indonesia announced a subsidy hike for biofuel production. Benchmark June BMD crude-palm oil futures closed 1.4% lower at MYR 2,161/ton at midday Friday.

The slump in the Malaysian ringgit, which is trading at around a six-year low against the U.S. dollar, has contributed to palm-oil price volatility.

Traders in the U.S. and Europe have also been attracted to trading palm oil futures, thanks to the historical correlation between their price and those of soybean and crude oil futures. Participation from such foreign traders started growing after the CME Group acquired a 25% stake in Bursa Malaysia Derivatives in 2009, which enabled the Malaysian bourse's derivatives to be traded on the Globex trading platform.

When two commodities trade broadly in line with each other, traders can benefit from so-called arbitrage opportunities when their respective prices move temporarily out of sync.

Palm oil futures prices move similarly to those for soybeans as the two are substitute products. They can also move in line with crude oil because palm oil is used heavily in biodiesel, an alternative fuel product to crude-based gasoline.

Terry Reilly, analyst at brokerage Futures International in Chicago said overall interest in palm oil futures is growing as the market is becoming an important indicator for soybean oil direction. Global benchmark soybean oil futures are listed on the Chicago Board of Trade.

Futures International hasn't offered trade in Malaysian crude palm oil but is now considering promoting the product due to robust growth in both volumes and interest of CPO futures in the last six to 12 months, said Mr. Reilly.

The volatility and increase in palm oil trading volumes however have also contributed to a more conducive environment for retail investors, especially for day traders who can enter and exit positions easily, say brokers.

Meanwhile, the CME Group's U.S. dollar-denominated crude palm-oil calendar swaps are also registering increasing participation from traders who want exposure to palm derivatives without the foreign currency risk associated with ringgit-denominated BMD futures.

Through CME ClearPort, a record 6,200 lots of palm oil swaps were cleared in September last year, while swap volume grew 59% in 2014 over an annualized figure in 2013, the market operator said.

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