Rising stocks, slow exports to pressure palm oil prices

Despite the emerging scenario of weakening fundamentals, crude palm oil prices have held well at Malaysia ringgit 2,650-2,750 a tonne levels in recent weeks, because of the dry spell in South-East Asia and Brazil. The situation has been exacerbated by the looming threat of El Nino.

Latest inventory figures from Malaysian Palm Oil Board are instructive. March-end palm oil stocks were up 2 per cent month-on-month at 1.7 million tonnes (mt); and higher than market expectation of 1.6 mt. Export data, too, are far from encouraging. March shipments were 8 per cent lower than the previous month and close to a fifth lower than in the previous year. Aggregate exports in the last two quarters were down 10 per cent compared with similar period the previous year.

Peak production season for palm oil begins by April. It is also the time when South America soyabean starts to hit the market. Despite some weather-induced loss, the soya crop in Brazil is still a record one at about 86 mt. Other oilseeds such as rapeseed and sunflower seed are available in abundance.

This has resulted in palm oil’s discount to other oils considerably narrowing to about $70 a tonne, making the former less attractive. The recently-released US planting intention report suggests that soyabean acreage may expand by 7 per cent.

Subject only to normal weather, the US will harvest a record crop again. The same goes for canola in Canada and rapeseed in Europe. In the second half of this year, the world may be awash with oilseeds.

From the demand side, the sentiment is far from positive. Typically, during the summer season of northern hemisphere (May to August), edible oil consumption declines.

The silver lining this year is the upcoming Ramzan festival in July which can create some demand. Otherwise, major importing countries such as China and India have good domestic harvests and decent levels of stocks.

So, going forward, crude palm oil prices are sure to come under pressure. The downside risk to prices may manifest itself by the end of this month or early-May. A correction of 10 per cent from the current levels may be on the cards.

To be sure, as of now, there is no clear evidence that El Nino will strike; but market participants seem to assumed that the adverse weather phenomenon will eventually materialise. Across agricultural commodities, prices have risen with sudden surge in speculative capital flow.

Coffee, sugar, corn, wheat, soyabean and cotton prices have moved up 10-12 per cent in recent weeks. Simply put, agri-markets are in the throes of weather-driven speculation. If and when weather normalises, there will be a huge sell-off by speculators.

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