Soybean oil and palm oil dominate the marketplace and account for roughly 62% of the total world production of edible oils. Both are considered "substitute goods" because food processors often switch between the two ingredients as the prices fluctuate. Theoretically this should limit the variability in price spread between the two markets, but that is not always the case. World soybean production is centered mostly in the U.S., Brazil and Argentina, and most of the world's palm oil comes from Indonesia and Malaysia. Several factors - drought, production difficulties and shifts in demand - can create tremendous volatility in the spread relationship.
This paper will analyze how the Chicago Board of Trade (CBOT) Soybean Oil futures and Bursa Malaysia Berhad (BMD) Crude Palm Oil futures contracts could be used to trade the spread relationship between the two products.