20/05/2010 (Comodities now.com) - Two new palm oil contracts launching in the United States and Indonesia may encounter difficulties similar to those experienced by benchmark Malaysian futures in growing liquidity. Success depends on whether planters from top palm oil producers Indonesia and Malaysia, as well as financial investors, see a justification in building up liquidity at a time of growing uncertainty in financial markets over the Eurozone debt crisis.

The CME Group's dollardenominated palm oil contract that debuts on Monday is tied to Bursa Malaysia's ringgit-based benchmark , providing a chance to trade the spread between palm oil and existing soyoil futures.

The Indonesia Commodity & Derivative Exchange (ICDX) will debut its rupiah-based palm oil contract on Friday, taking a second shot at creating a domestic benchmark price as estates expand and output accelerates in the Southeast Asian nation.

"Bursa Malaysia may have the benchmark, but it's not that liquid, there is no forward curve in that market," said Scott Briggs, a commodities strategist at ANZ Banking Group.

"What we need is more dedicated hedgers to build up the contracts, whether it's the new contracts or the existing benchmark. The key players in Indonesia and Malaysia need to form a stronger base."

Although big planters such as Sime Darby and Wilmar trade on Bursa Malaysia's ringgit-based contract, average daily trading volumes in April stood at 225,000 tonnes, with foreign investors taking up just 20 percent. That is tiny compared to refined palm olein futures on the Dalian Commodity Exchange, which notched up average daily trading volumes of 1.7 million tonnes in April -- a sign of China's huge investor base and booming appetite for palm oil as a cooking medium.

Lack of Enthusiasm?CME, the world's largest derivatives exchange, is counting on deep U.S. commodity markets and the tropical oil's relationship with soyoil to boost liquidity for the contract. Soyoil normally trades at a premium to palm oil as its oil yields are lower, but this year palm oil is narrowing the gap and even trading at a premium at times as Malaysia faces a second year of weak output and South America exports a bumper soy crop.

Traders say palm oil prices, which have fallen 9 percent this year, may initially get a boost as U.S. investment banks such as Goldman Sachs and Morgan Stanley get easier access to the Malaysian benchmark.

But with the U.S. Senate set to vote on a landmark Wall Street reform bill that may involve curtailing financial market risk-taking, commodity markets may see liquidity growth suffer.

"If investment banks have to roll back on these reforms, which are likely to be passed, tapping into the palm oil markets is the last thing on their minds," said an analyst with a U.S. investment bank based in Hong Kong. U.S. traders cited light volumes in new contracts, such as ethanol and distillers' dried grains with solubles (DDGs) , both deemed more promising than palm oil, as the reason behind a lack of enthusiasm for palm oil's new launch.

"We have had a hard time getting some of those new contracts going," said Don Roose, analyst with U.S. Commodities in West Des Moines, Iowa. "This may be another one of those."

Roose said the palm oil contract was more likely to attract interest from international traders during overnight sessions since palm oil is a non-U.S. commodity.

Managing Risk
Growing liquidity is a bigger problem for the Indonesian palm oil contract, where there is a much smaller investor base and a lack of reliable palm oil industry data to trade on. But the Indonesia Commodity & Derivative Exchange (ICDX) plans to counter this by working with third parties to source Indonesian data although no firm timeline has been put in place.

It has also persuaded 20 firms, including Wilmar, Sinar Mas Agro Resources Tbk and Bakrie Sumatra Plantations Tbk to trade the rupiah contract and manage currency risk. Analysts said although Indonesian planters will still look to Malaysian palm oil futures for guidance, the ICDX prices may give useful reactions to the changes Jakarta makes on monthly export taxes on the vegetable oil.

But Indonesia's largest listed planter, Astra Agro Lestari , is not venturing into either the U.S. or Indonesian palm oil contract for the time being, preferring to use the contracts as guidance for its auctions.

"We prefer to do spot trading and just follow whatever is the price movement. I don't think there is any difference by trading in futures and it just causes a headache," said Widya Wiryawan, president director of Astra Agro.