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G. Chandrashekhar

Mumbai, March 11 The global vegetable oil industry and trade is focussed on the palm oil price outlook deliberations going on in Kuala Lumpur. What are the price prospects for palm oil over the coming months?

A basic tenet of the commodity market is that it moves on the basis of not only today’s demand and supply fundamentals, but more importantly on expectations of changes in the future. In addition, non-fundamental factors such as currency, speculative capital, weather and geopolitics too exert influence on commodity prices. The global vegetable oil market is thus subject to the impact of a plethora of factors, fundamental and non-fundamental.

In the last 3-4 years, the vegetable oil market was largely demand-driven. Market prices, mainly of palm oil and soyabean oil, were a function largely of demand from the burgeoning biodiesel sector and huge flow of speculative capital. A dramatic change has occurred since mid-2008. Currently, global economic growth and, in turn, growth in vegetable oil consumption are top concerns.

A rapidly fallen crude mineral oil market further exacerbated the price collapse of vegetable oil because of the by-now well established linkage between food and fuel markets in the context of biofuels. In the coming months, therefore, the supply side, rather than demand side, is more likely to engage market attention.

The major supply side developments in the second quarter of 2009 and a little beyond would include soyabean acreage in the US, beginning of peak palm oil production season from April, supply pressure from South American harvested crop and low Indian summer season demand during April/July for cooking oils.

Weather would, of course, continue to remain a hugely uncertain factor in all the major origins, including the US, China and India. Preliminary indication of India’s Southwest monsoon for 2009 would be available by end-April.

Other factors to be watched are crude oil prices, inflation expectations, currency movements especially of the dollar, changes in long/short positions of punters on futures exchanges, and lastly, outcome of general elections in India and attitude of the new government.

On current reckoning, the US soyabean acreage for 2009-10 is most likely to expand by 2.5-3.0 million acres, raising strong hopes of a further rebound in crop size, beyond the previous year’s 80 million tonnes (mt). This could be a huge swing factor.

Although the South American crop (Brazil and Argentina) is rated about 6 mt less than that in the previous year, it is still large enough to exert pressure on market prices. Added to this will be India’s large rabi crop, mainly rapeseed/mustard estimated to have expanded by a fifth to be close to 7 mt. There is also a significant crop of groundnut in-shell harvested in summer.

World palm oil production has been rising between 2 mt and 4 mt in recent years. The trend is expected to continue and will add to global supplies.

Indian consumption of cooking oils generally declines during the summer months. There is already sufficient inventory in the country, with traders having imported excessive quantities in anticipation of a duty hike.

The offtake is likely to be limited over the next three months. Already there is disparity between local sale price and landed cost of imported oils which varies between Rs 1,200 and Rs 3,000 a tonne depending on the oil.

With the Indian rupee at a record low, imported oils are so much more expensive.

Given the current price differential of over $100 a tonne between palm and soya oils, palm will continue to garner larger share because of the price discount.

However, expectation of larger soya crop would pressure soya oil down, which, in turn, will pressure palm prices further down. Palm oil will continue to trade at a discount to soya oil and the discount may vary between $75 and $125 a tonne.

Soya oil stocks are building steadily. Palm oil stocks in Malaysia have steadied and are set to decline marginally in the coming months; but together with Indonesian stocks they are still heavy enough for the world market characterised by fragile demand conditions.

When these factors are put together, it is apparent that the upside potential of palm oil prices is limited, and there is a downside risk.

Around the time of price outlook conference, crude palm oil usually shows a strong rise, perhaps to send a positive producer-centric message to the market. This year has been no exception.

Crude palm oil may trade in a range of MYR (Malaysian ringgit) 1700 on the low side and MYR 2200 a tonne on the high side over the next three months.

In addition to weather, two factors need close watch. One is the crude market.

Crude prices run an upside risk. Given the tightening fundamentals, $45-55 a barrel in the near future looks a distinct possibility. If crude stays above $50 a barrel for an extended period, it would help lift palm oil to an extent.

The second is the dollar. There is general consensus among forex strategists that it will begin to weaken in the second half of the year. In the event, commodity prices overall may get some lift from a weakening dollar which will have a rub-off effect on palm oil.

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