Oil palm equilibrium

When the demand of palm oil increase, the oil palm price will be good. Follow up will be good cash flow of the oil palm company that pile up their cash. This will induce the company to expand and plant more oil palm. Later on the increase of supply will lower the oil palm price.

When the supply of palm oil increase, the oil palm price will be down. Bad cash flow will reduce the activities of expanding and replanting. Reduce supply will increase the oil palm price.

Because of the 3 to 5 year period for oil palm tree to mature, the delaying effect (slow respond to changing demand and supply) will cause the oil palm price to move in sinusoidal form. Of the volatile nature of the oil palm price, the center of the sinusoidal is the equilibrium of the oil palm price. And this price equilibrium only move according to the real demand, which ultimately depend on the growing of population and growing of wealth. These 2 are relatively stable factors.

Above mentioned is the natural self adjustment mechanism of oil palm price. However, artificial factors like excessive bank borrowing to expand and diversifying into oil palm business by other industry company (they can using their other business profit to support oil palm business expansion), can disrupt this self mechanism and further exaggerate the volatility of the oil palm price.