Crude palm oil futures prices have recently fallen below the psychological level of Malaysian Ringgit 3,000 a tonne.

Sharper declines are expected from April with prices most likely to hurtle towards MR 2,400 in the months ahead. This follows strong and widespread expectations this year of a significant rebound in global vegetable oil production, including crude palm oil, combined with concerns over weak demand in major consuming markets as also a strong dollar and contained rise in crude mineral oil rates.

Indeed, indications are that the peak palm oil production season, which usually starts from April, may advance to March this year as trees recover from the adverse effects of El Nino in 2015-16.

Indeed, as usual, there will be attempts to keep the mood buoyant during the upcoming price outlook conference in Kuala Lumpur; but the props will eventually give way to market fundamentals that are loaded against marked price gains.

Expansion projection Palm oil production is forecast to expand by close to six million tonnes in 2016-17 with both Indonesia (35 million tonnel ) and Malaysia (20 million tonne ) recovering from previous year’s adverse weather effects.

Other origins, minor though, would contribute about 9 million tonnes. Overall demand (food, fuel and industrial) is projected to trail production, with major importing countries China and India already registering a slowdown in imports. For instance, India’s palm oil imports were lower in January.

A rebound in India’s oilseeds harvest (soybean in kharif season and rapeseed in rabi) is helping raise domestic vegetable oil production and has already sent local prices hurtling down. Indeed, if the Indian government hikes customs duty on imports (a likely prospect), it could weigh more heavily on palm oil prices.

With another record world soybean crop in the offing this year and robust demand for meal, higher crushing will make more soybean oil available. Palm will suffer as a consequence.

For the time being, there are two support factors that will slow the pace of palm oil price fall. One is the tight inventory position in the two major origins, and the other, the biodiesel mandate.

While stock tightness will begin to ease from June-July, Indonesia’s policy-induced demand is expected to provide a floor at around RM 2,300. If the ambitious biodiesel target is not met, the floor can potentially give way.

The crude oil market, too, is less helpful for a recovery in vegetable oil prices. Despite the recent agreement among major producers, prices could come under pressure as the US ramps up shale oil production. Discretionary blending will take a hit.

There may be occasions this year when crude prices may breach $60 a barrel and move upwards; but such levels may not sustain for long.

Potential risks There are several event risks that can potentially impact broader commodity markets. These include three elections in Europe and the US Fed rate hike. Trump-induced volatility cannot be ruled out either. However, none of these is expected to leave a marked impact on vegetable oil prices.

So, with limited support and keen competition from other oils, palm oil will have to be priced really attractively to retain market share. There is no doubt that producers have to brace themselves to face looming market realities.

The writer is a global agribusiness and commodities market specialist. The views are personal

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