World vegetable oil prices, already corrected down from their recent highs because of sluggish demand growth and rising inventory, are likely to face further price pressure, thanks a big rebound in production anticipated in the northern hemisphere in the months ahead.

In 2013-14, global oilseeds production - planting for which is in various stages of progress - is forecast to expand by about five per cent to a new high of 491.3 million tonnes compared to 469.4 mt harvested in 2012-13 and 441.9 mt a year earlier, the US Agriculture Department said in its latest WASDE (world agriculture supply and demand estimate) report issued on Friday.

Rise in production

Contributed by an increase in production of major oilseeds and tree-based oils (palm oil, coconut oil), world vegetable oil production is likely to witness a big jump of six million tonnes to reach a new high of 166 mt in 2013-14.

With tepid demand growth prospects, the impact of such a large supply increase can well be imagined.

While world soyabean production is forecast to reach 285.5 mt (269.1 mt), the US seems to be on course to account for about 10 mt of the additional harvest with a forecast output of 92.3 mt (82.0 mt).

In 2012, the US Midwest faced its worst drought in decades that hurt soyabean yields and production. Not just oilseed crops, palm oil is also going make a significant contribution to the global vegoil basket.

For 2013-14, palm oil output is forecast at 58.1 mt, up from 55.3 mt in the current year (2012-13) and 51.9 mt in 2011-12.

Indonesia will produce an additional 2.5 mt palm oil to register a new high of 31 mt while Malaysian production is expected to remain unchanged at 19 mt.

These two origins account for over 80 per cent of world palm oil output. However, what is of greater interest is the steady rise in the ending stocks of palm oil over the last five years.

For 2012-13, ending stocks are estimated at 7.9 mt which is set to rise further to 9.6 mt in 2013-14, according to USDA. So, where does all this leave vegetable oil prices?

Globally, soyabean fundamentals look bearish as Chinese and EU demand looks lacklustre.

The Chinese - voracious importers and consumers of soyabean at about 60 mt - are currently destocking because of the large inverse that incentivises it. Additionally, recently harvested soyabean supplies from South America are hitting the market.

Logistics in Brazil that forced a slowdown in exports are beginning to improve. Indeed, if growers in Argentina who are holding back the crop begin to sell, there will be a huge additional supply pressure.

palm oil inventories

At the same time, palm oil inventories in Malaysia were reported to be 1.93 mt by end-April, although many believe it may not have fallen below two mt.

However, of greater import is that seasonal factors have already kicked in and palm oil production has started to rebound. The peak season usually continues until October.

Again, global palm oil inventories - at origins and destinations - have been rising, leading to a slowdown in export orders from the producing countries.

According to reports, Chinese port inventories have risen to a new high of 1.3 mt versus (1.2 mt in March). This coincides with high inventories in India estimated at close to two mt.

Of course, Indian importers indulged in excessive imports in January and February in the vain hope of a hike in customs duty. Clearly, the market is in a state of surplus. Demand growth trails production growth. No wonder, speculative funds have moved to the sidelines in the absence price appreciation potential.

In sum, a combination of production increase, sluggish demand growth and rising inventory has meant that the emerging situation is fraught with the strong possibility of a further decline in crude palm oil prices.

Fierce competition between Indonesia and Malaysia to garner market share is also a factor to reckon with. Notwithstanding brave predictions by some experts of a price spike, the palm oil market is already struggling to retain the Ringgit 2,300 a tonne levels.

Over the next four to six weeks, the market faces the risk of a downward movement towards Ringgit 2,000 a tonne, subject of course to normal weather in the Northern Hemisphere.

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