Crude palm oil prices have taken a significant beating of late, despite Malaysian palm oil stocks remaining unchanged in July (1.66 million tonnes) compared with June. There are several overriding factors that impact palm oil prices, not the least of which is a large oilseed crop in the making in the northern hemisphere.

The anticipated large supply of vegetable oils is pulling prices down across the complex. With rising competition, palm oil is impacted more than other oils. Contrary to earlier belief, there is consensus that the much-feared El Nino phenomenon is likely to be a mild one which means palm oil production is likely to be largely unaffected.

Record crops

On the other hand, experience shows that when South-East Asia faces El Nino induced dry conditions, North America experiences excellent spring weather and crops there perform rather well in terms of production and yield. This is what’s happening currently.

A record corn (maize) crop is in the making in the US, while soyabean harvest is estimated to be in the vicinity of a record high in excess of 100 million tonnes. Add to this the large inventory in South America (Brazil and Argentina) and you have abundant supplies running much ahead of known demand. Weather in the US Midwest during August is crucial for high yields.

As strong rate of US soya crush for meal export will mean additional availability of soya oil in 2014-15. The market will be guided by near-term fundamentals which suggest a large harvest, adequate stocks, and surplus availability. The world vegoil market is in a state of oversupply. Speculative capital usually provides an artificial boost to prices stays away under such surplus conditions.

Consumer-friendly prices

As for palm oil itself, production has now entered the seasonally high cycle in Malaysia and Indonesia. Export numbers too are not really encouraging. The narrowing price differential between palm oil, on the one hand, and soya, rape and sun oils, on the other, makes the former less attractive. As against the usual differential of anything between $170-200 a tonne, currently, the differential is as low as $75 vis-a-vis sun oil, $90 with rape oil and $100 with soya oil. To retain its market share, palm oil has to price itself further down. Malaysian crude palm oil futures have fallen below 2,200 Malaysian ringgit a tonne and there is widespread belief that there is further downside possibility of 10 per cent.

So, one can expect palm oil prices to stay consumer-friendly in the next three quarters hovering between $675 and $750 a tonne. The earliest that prices may start rising could well be in the second half of 2015.

Despite acute dry conditions in June, Indian oilseed acreage has shown some resilience. The latest acreage data are not really inspiring but the harvest is not going to be a disaster although there will most likely be a shortfall in kharif harvest as compared with last year as compared with kharif 2013.

Related Topics
comment COMMENT NOW