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PALM:nomics

Presented by : Ali Muhammad Lakdawala


ITC Ltd (Foods Division) India
Email : alimuhammad.lakdawala@itc.in

OFI India 2016


Views shared in the paper are authors view and not to be
considered as companys view or being endorsed by
Disclaimer
company which author represents.
Abstract
Economics teaches that the market economy, if left on its own devices it will maximise the utility
of each individual and to the best of all the possible worlds. However, now we see how a flood of
new ideas is providing us with the tool to shape a better, fairer and more sustainable economy.
These ideas come from diverse sources: new areas of mathematics, social movements like
environmentalism or feminism and also the ancient discipline of ethics. Current economic theory
is less a science that an ideology peculiar to certain period of history, which may well be nearing
an end - EconoMyths

Paper will discuss various economic terms/buzzwords which has flooded the market in recent
times, post which it will unveil "PALM:nomics". The new concept/paradigm/buzzword which I am
proposing is not confined to the commodity markets or commodity alone but it deals with the
relationship between economic policies and price change of commodity/commodities, it tries to
demystify that the economic policies at producing centre and various external economic factors
along with closely related commodities, which play a major role in influencing the price behaviour
besides commodity/commodities fundamental S&D. It also cautions key producers on NEVER
GET HIGH ON YOUR OWN SUPPLY and deprive the consuming centre. Further to that paper will
also explore the behaviour of key consuming centre (.i.e) India, and how price change influences
the decision making process.
Last but not the least, paper will conclude by revisiting palm price forecasts for 2016
NOMICS

Nomics is derived from the Greek word "nmos" meaning "law." Thus the fields
ending with "nomics" means "law of" whatever the prefix is Wikipedia
Various Buzzwords with nomics
Economics comes from the Greek word (oikos, "house") and (nomos,
"law"), hence "rules of the house
Freakonomics a Rogue Economist Exploring the Hidden Side of
Everything
Reaganomics refers to the economic policies promoted by American
President Ronald Reagan

The four pillars of Reagan's economic policy were to Reduce the growth of government
spending, Reduce the federal income tax and capital gains tax, Reduce government
regulation, and Tighten the money supply in order to reduce inflation
Clintonomics refers to the economic policies promoted by American
President Bill Clinton

The policy focused on Establishing fiscal discipline and eliminating the budget deficit,
Maintaining low interest rates and encourage private-sector investment, Eliminating
protectionist tariffs and lastly Investing in human capital through education and research
Obamanomics refers to the economic policies promoted by American
President Barack Obama

Policies are a combination of tax increases on the wealthiest Americans and investment in
myriad public services such as scientific research, infrastructure, health care reform, and
education that is meant to boost the American economy and future prospects.
Obamanomics may also include the Presidents views on healthcare reform, although this
often goes by the separate moniker of Obamacare".
Putinomics refers to the economic policies promoted by Russian
President Vladimir Putin

Series of liberal economic reforms, such as the Flat income tax of 13%, Reduced profits-tax,
a New Land Code and a New edition of the Civil Code. "Putinomics" was a transitory mix of
political necessities and economic prudence
Abenomics refers to the economic policies promoted by Japanese Prime
Minister Shinz Abe

Its based upon "three arrows" of Fiscal stimulus, Monetary easing and Structural reforms.
The Economist characterized the program as a "mix of reflation, government spending and a
growth strategy designed to jolt the economy out of suspended animation that has gripped
it for more than two decades
Xiconomics refers to the economic policies promoted by Chinese
President Xi Jinping

It is a policy mix to support sustained growth in challenging international environment.


Based upon Supply-side structural reform, the new growth driver under the new normal.
Wherein, Supply-side economics seeks to increase output and boost jobs by changing the
conditions under which goods and services are -supplied
Modinomics refers to the economic policies promoted by Indian Prime
Minister Narendra Modi

"Modinomics" is essentially about Creating efficient bureaucracy, Developing the necessary


infrastructure to support industry, and work successfully with foreign and domestic
investors to get their projects implemented efficiently and to strict deadlines. Its about free
market with minimal interventions
Najibnomics refers to the economic policies promoted by Malaysian
Prime Minister Najib Razak

Its a set of policy measures meant to transform Malaysia into a high-income and developed
nation by 2020 which is to be achieved by dual objectives. First is the high, sustainable and
quality economic growth and Second is the attainment of Happiness by having more
opportunities, better social systems in country and stable inflation rates
Jokonomics term used to refer the economic policies promoted by
Indonesian Prime Minister Joko Widodo

It is a set of policy measures for Increasing the minimum wage, against the persistent
lobbying of big business, is a necessary tool to narrow the gap between price inflation and
purchasing power
Womenomics term used to refer the Japan changing workforce & 3
Women Ruling the World Markets
"To understand what is going on we need a new paradigm. The currently
prevailing paradigm, namely that financial markets tend towards
equilibrium, is both false and misleading; our current troubles can be
largely attributed to the fact that the international financial system has
been developed on the basis of that paradigm. - George Soros

So, its time to unveil new concept/paradigm/buzzword (.i.e)

"PALM:nomics or Palmonomics
PALM:nomics term based on concept of palm oil price response
towards changing dynamics/new paradigm. Not only price gets influenced by S&D
but various economic factors (few factors explained)
BMD CPO (MYR/MT)
3500 BioD Why
Influence sudden
3000 uptick???

2500
Normal Phase of S&D Search for
Economic Influence EL Nino &
2000
Producing
Centre BioD
1500 policies in
balanced
S&D market
1000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Until
Mar
2016
CPO prices on BMD was in terminal decline since 2012 onwards until 2015. There
were many instances wherein BULLS tried to pull the prices higher but to no
respite. It was only in mid 2015 the price trend started to change which is on
going until now

Y-o-Y BMD % Price Change


20% 18%
15%
15%
10%
5%
0%
-5% -1%

-10% -7%
-8%
-15%
-20% -18%
-25%
2011 2012 2013 2014 2015 Until Mar 2016
PALM:nomics as a concept holds significant relevance at present, as we have
seen good revival in prices from mid 2015. So what are various reason for such
rebound/response in prices???
BMD Monthly Price Chart (MYR/MT)
3000

2800
Price Response
2600 towards POLICIES
set by key producing
2400 centres & finally end
of search for EL Nino
2200 effect on production

2000

1800
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Before we proceed further in understanding various factors for price uptick, let us
understand that the current growth model of emerging economies, which is
primarily fuelled by huge influx of capital from developed economies. To an
extend that emerging market economies at present have larger holdings of
external liabilities and assets, including foreign reserve assets
IMF Representation of Net Capital Inflows to Emerging Economies & Number of Debt Crisis
(1980-Q32015)
6.00
5.00 Number of Debt Crises Net capital inflows
4.00
3.00
2.00
1.00
0.00
-1.00
-2.00
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Q3 2015
Resultant in Debt Laden Economies - DEBT LADEN economies which will be more
gruesome for global economy than the actual return of Bin Laden himself. The
impact of the fall in commodity prices for exporting countries will be far reaching,
they are not limited to the oil firms in emerging economies but other commodity
exporting countries as well. Even US shale producers are expected to report their
unmanageable debt numbers. All of this debt would be major concern for BANKS
who are lending partners

120 Gross Debt % of GDP


2011 2012 2013 2014 2015 2016e
100

80

60

40

20

0
China Russia Saudi Malaysia Indonesia Brazil India Argentina US
Arabia
Bleak prospects for growth in emerging economies relative to advanced
economies can explain most of the slowdown in total capital flows to emerging
markets since 2010. Besides that tightening of monetary policy in US is also one
of the reason, as a result Dollar Index strengthen acts as a safe bet

Net Capital Inflows to Emerging Economies vs Dollar Index(DXY)


Net capital inflows DXY
5.00 140.00
4.00 120.00
Net Capital Inflows

3.00 100.00
2.00 80.00

DXY
1.00 60.00
0.00 40.00
-1.00 20.00
-2.00 0.00
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Q3 2015
Considering the dollar index movement to understand overall impact on
commodities. There is inverse relationship : with reducing capital inflows =
strengthen of dollar = impact on export dependent economies = decrease in
demand or demand deferred to later date especially in case of industrial
commodities

IMF Commodity Index vs Dollar Index(DXY)


220 130
Commodity Price Index DXY
200 125
Commodity Index

120
180
115
160

DXY
110
140
105
120
100
100 95
80 90
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13

Mar-14
May-14

Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
Jan-14

Nov-14
Sep-14
Jul-14
With declining capital flows & rise in dollar index, resultant impact is evident on
the currencies of the emerging economic nations. Considering below the currency
of key Palm Oil Producer & Consuming nation : there has been significant
depreciation of MYR & INR

Ringgit(MYR) vs Dollar Index(DXY) Rupee(INR) vs Dollar Index(DXY)


4.5000 150.00 75.00 150.00
MYR DXY INR DXY
4.0000 65.00 130.00
130.00

3.5000 55.00
110.00 110.00

3.0000 45.00

DXY
INR
MYR

DXY
90.00 90.00
2.5000 35.00

70.00 70.00
2.0000 25.00

50.00 15.00 50.00


1.5000

1.0000 30.00 5.00 30.00

198
1980
1981
1982
1983
1984
1985
198
1987
198
1999
1990
1991
1992
1993
1994
1995
199
1997
1998
2009
2000
2001
2002
2003
2004
2005
200
2007
200
2019
201
2012
2013
2010

Q3 4
Q314
198
1980
1981
1982
1983
1984
1985
1986
1987
1988
1999
1990
1991
1992
1993
1994
1995
1996
1997
1998
2009
2000
2001
2002
2003
2004
2005
2006
2007
2008
2019
20111
2012
20 3
20 0

1
6
8

6
8

201
201

5
5
Depreciating MYR does have an impact on overall realisation of Palm Oil value to
the exporters and in turn impacts countries GDP. Even though price behaviour
cannot be totally attributed towards external factors, as Palm own fundamentals
also influences movement to an extend
MYR vs Malaysian GDP CPO ($/MT) vs MYR
12.00 4.50 1300 4.50

10.00 %GDP MYR CPO $/MT MYR


4.00 1200
8.00 4.00
3.50 1100
6.00
3.00 1000
Malaysia GDP %

4.00
3.50

CPO ($/MT)
2.50 900
2.00

MYR
MYR
0.00 2.00 800
3.00
-2.00 700
1.50
-4.00
1.00 600
2.50
-6.00
500
-8.00 0.50

400 2.00
-10.00 0.00

Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14

Jan-16
Mar-16
Jan-15

Jul-15
Sep-15
Nov-15
Mar-15
May-15
1980
1981
1982
1983
1984
1986
1987
1988
1989
1990
1991
1992
1993
1994
1996
1997
1998
1999
2000
2001
2002
2003
2004
2006
2007
2008
2009
2010
2011
2012
2013
2014
1985

1995

2005

2015
Last but not the least, we been seeing divergent trend between Brent Crude &
Palm Oil prices. Initial supportive phase was on the back of BioD demand but that
seem to have lost its hold, as Brent Crude prices have cracked sharply compared
to Palm Oil prices. In turn making BioD less lucrative unless Brent rebounds
sharply & change its own tide???

1400 Palm Oil vs Brent Crude 140


CPO $/MT Brent Crude
1200 120

Brent Crude ($/bbl)


1000 100
CPO ($/MT)

800 80

600 60

400 40

200 20
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14

Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
Jul-14
Mar-14
May-14
Hence, taken in consideration all of the factors listed before. We analyse the
reason for current uptick in Palm Oil prices which has been prevailing since mid
2015. Dollar Index has been rising, Brent Crude has been declining, BioD is not
lucrative anymore. Still Palm Oil prices are on upsurge???
PALM : nomics MPOB Palm Oil Stocks Data(MMT) vs BMD CPO Prices(MYR/MT)

Palm Stocks BMD CPO


It started with concern over 3.50 2700
EL Nino impact on
Production 2600
3.00

Palm Oil Stocks (MMT)


2500

BMC CPO (MYR/MT)


Followed by Producing
Centres Conscious Efforts 2.50 2400
to reduce stocks by 2300
implementing BioD policy
2.00 2200

Powerplay of importing 2100


nations as Palm is still 1.50
least expensive oil 2000
compared to other edible
1.00 1900
oils
Aggressive BioD policies were rolled out by Malaysia & Indonesia in order to drain
out excessive stocks of Palm Oil. Even though conventional fuel is much cheaper
than BioD & Govt of both countries will be burning their reserves but its yet to see
how long they can carry on, as it will deprive importing nations. Its rightly said
NEVER GET HIGH ON YOUR OWN SUPPLY

Indonesia & Malaysia : Domestic Consumption & Exports (MMT)


2011-12 2012-13 2013-14 2014-15 2015-16

30.00
25.30 24.50
25.00
20.00 17.38 17.65

15.00
10.00 7.62 8.62

5.00 2.95 3.28

0.00
Domestic Consumption Exports Domestic Consumption Exports
Indonesia Malaysia
PALM:nomics or Palmonomics
Takes in consideration all the various buzzwords as it cannot work in
isolation. Its the concept which can be used to explain any commodity
dynamics. However, it also cautions the policy makers of producing
centres that if they get high on their own supply in turn they would lose
the key consumer (explained later)
INDIA
Major policy rolling out from key producing centres would have a definite impact
on key consuming centre too (.i.e.) India. Let us understand dynamics of Indian
edible oil industry
India Edible Oil Production & Imports (MMT) India Edible Oil Demand % of Imports
90.00%
Imported Domestic Production
80.00%
2016-17

2015-16 70.00%
2014-15
60.00%
2013-14
50.00%
2012-13

2011-12 40.00%
2010-11 30.00%
2009-10
20.00%
2008-09

2007-08 10.00%
2006-07 0.00%
0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00
Since Indian domestic edible oil production is not sufficient to meet its domestic
edible oil demand for that reason there is high dependency on imports. With Palm
being the most preferred oil due to price competitiveness and less transit.
However, Indian Importers keep switching between palm & soft oils basis price
advantage. Current year there has been good imports of soft oils

India Imports of Palm Oil vs Soy Oil (MMT)


10.00 4.00
Palm oil Soy oil
9.00 Palm Oil Import CAGR 13% 3.50
8.00
3.00
7.00
Palm MMT

Soy MMT
2.50
6.00
2.00
5.00
1.50
4.00
Soy Oil Import CAGR 9% 1.00
3.00

2.00 0.50
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e
India is expected to lead the global growth as China slowed down. However, India
is the largest importer of its oil needs (both petroleum & edible oil) and in recent
times it has been very aggressive in rolling out policies pertaining to Biofuel &
BioD to reduce import dependency. Restricting our discussion to BioD
SALIENT FEATURES OF INDIAS BIOFUEL POLICY

Derive biofuel from non-feed stock that would be grown on degraded soils or wastelands not otherwise
suited to agriculture, thus avoiding a possible conflict of fuel versus food security.

Strengthen Indias energy security by encouraging use of renewable energy resources to supplement motor
transport fuels. An indicative 20-percent target for blending of biofuel for both biodiesel and bioethanol is
proposed by end of 12th Five-Year Plan (fiscal 2012/13 throughfiscal 2016/17).

Minimum Support Price (MSP) mechanism for inedible oilseeds to provide fair price to oilseed growers but
subject to periodic revision.

On January 16, 2015, the Union Cabinet decided to suitably amend Para 5.11 and 5.12 of the national
biofuel policy for facilitating consumers of diesel in procuring bio-diesel directly from private bio-diesel
manufacturers, their authorized dealers and joint ventures (JVs) of OMCs authorized by the Ministry of
Petroleum and Natural Gas (MoPNG), GoI. The price of biodiesel will now be market determined.
The enthusiasm of producing biodiesel from jatropha has apparently faded despite its
potential to withstand drought and rehabilitate degraded wastelands. Lack of promising
varieties/cultivars, rising wage rates, and inefficient marketing channels has risen the cost
of production, making it economically unviable proposition. Consequently, there has been
no commercial sale of biodiesel across the biodiesel purchase centers set up by the GoI. At
present feedstock used for BioD is from used cooking oil (rice bran oil, palm stearine, cotton
seed oil and fatty acid oils) and Animal Fats & Tallows.
Indian BioD Production(Million Liters) : USDA Feedstock % Share
160
2010 2011 2012 2013 2014 2015 2016e
140

120 Used
Cooking
100 Oil
Other Oils 38%
80 57%

60

40
Animals
20
Fats &
0
Tallow's
5%
BegStock Prodn Consumption End Stocks
Outlook
VUCA PALM:nomics would adapt to any situation
Global Growth has become too fragile : 2016 will be challenging year as there is no certainty

Currency Volatility will be at accelerated levels. In the era of uncertainty DXY to strengthen further in
2016 = reverse impact for commodities

Raw material exporting nations will feel the pain as concrete demand is out of sight & how long
current rebound in prices would sustain???

India is touted to be next big thing : Will it deliver or disappoint??? Needs to be watched

We continue with ECG that needs to be closely monitored for health of Edible Oil & Oilseeds(ie) :

EL Nino : Impact on Palm need to be watched closely. Will there be La Nina???

China : Many weaknesses will resurface as it navigates from Old to New Chinese Growth Model

Greece : major threat to EuroZone (dollar to gain upper hand)

Soft oils could sway edible oil market & Palm price needs to clamp down it speeding upsurge
Price Outlook
Had been BEARISH on Brent Crude Oil since May 2015 and we have seen markets tanking towards initial target of $30 as it
bottomed at $27.10/bbl. Expected BEARISHNESS to continue on Brent Crude & price should break low posted in 2016 & for
brief period head below target of $20/bbl, unless GeoPoli gimmick gets intensified.
However, markets have rebounded but Dont see a case of demand driven rally, it would be more or less a range bound market
from current levels & hover between $45-30/bbl and below that could take markets towards 2016 low of $27/bbl later on to
$20. Unless Iran changes its mind to join hands with Saudi on production cut which could take Brent Crude towards $60/bbl.
But each has its own needs & doesnt look like they keen to work hand-in-hand. Markets will be volatile & vulnerable
Outlook for Palm oil had expected prices to be topping out towards 2600MYR getting supported by weather play along with
possibility of BioD demand by producing centre to cut down stocks (plans on going since 2014 but will it be reality???). We
have seen market shooting additional 150MYR from the levels shared which was power play of PALM:nomics explained.
It looks like Palm Oil market continues to reel under Irrational Exuberance" and current price levels cannot be sustained at
current pace else it would start to trade at premium to bean oil. We would see market to correct initially towards 2400 and
later 2200MYR followed by levels shared in Nov'15 (ie) towards 1950 MYR (unless Council of Palm Oil Producer Countries
exercise the Cartalisim) or WEATHER PLAYS A SPOILSPORT
Factors to be watched out for Palm market : BioD demand at producing centres & Q3 Production Numbers
Depreciating MYR will make Palm Prices cheaper for importing centres : target shared in Nov'15 for MYR was declining
further towards initial 5.10 & worse case 5.45 against USD due to China & its own internal issue. However, Malaysian Govt
done excellent job in stopping the slide but RISK still looms
India will be key player which needs to be watchful as whole world is hoping that it would driver global growth but need to be
cautious : reason being the growth story will take its own time to shape up but surely not very soon. INR made a low of 68.50
and we continue to hold to next level of 70 cannot be ruled out
VUCA Thank You

Disclaimer : Views shared in the paper are authors view and not to be considered as
companys view or being endorsed by company which author represents.