FUPO's Significance

Friday marks the first day that FUPO will be traded. Got to love the lack of marketing. Maybe the promoters are not sure if the product will take off (reminds me of the nice but under-marketed Iketeru restaurant in Hilton). Following the dismal showing of the palm kernel futures, I guess that is understandable. FUPO is USD denominated CPO futures. Many seem to think it will be a non-event. I am actually very keen on the product:

a) Its a natural hedged instrument in USD. Most buyers priced all commodities in USD anyway.Sellers of CPO can immediately lock in the USD when they commit to a sale, buyers can do the same, taking out the currency effect.

b) 99% of all CPO traders look at soya bean oil to predict movements in CPO. By having the USD futures, it can be better matched to soya bean oil futures. This will give a better analysis on gap differentials between the two substitutable product. It will bring in the standard gap differential and reduce the volatility between the two products.

c) The CPO USD contract would always be placed next to soya bean oil futures USD, hence it may take leadership over the ringgit CPO futures very soon. Just a sprinkling of exposure by the index speculators will cause a surge in liquidity.

d) The USD contract initially will be more traded by genuine buyers and sellers, because USD denominated contracts, like it or not, is the rule of the day. I expect the speculative activity to gradually migrate to the USD contract as liquidity will surely grow much faster for the ringgit contract.

e) Though there are some international traders on the ringgit CPO now, many more would be concerned on the ringgit as it is still non-transactable overseas. A USD contract would allow traders to match volatility trades minus the currency effects.

f) Some may think the sellers and buyers are mainly Malaysian companies, but we have to remember that quite a number of outstanding bonds by CPO companies are denominated in USD as well. Plus we have the Indonesian major CPO players as well, which contract do you think they want to trade. The contract would allow for treasury operations to gear up or gear down on cash movements in the two currencies according to company requirements now and a few months down the road.

Its a very good move and a very good product... pity that the people who mooted it has no confidence and is seemingly under marketing the relevance and potential of the product. Sigh... need more market savvy people in these institutions, yes I am harping on the same stuff, too many people in these institutions without direct market experience making decisions for all of us. I guess after a few weeks when the contract is a major success, all the senior management and ministers will pose for lots of pictures to claim credit.

p/s photos: Son Dam Bi