In the last two-three months, crude palm oil (CPO) prices have rallied much to the relief of producers, especially in Malaysia and Indonesia, two of the world’s largest producers. If anything, the market was caught unawares.

A combination of factors on the supply side and demand side boosted the price sentiment. Weaker output growth was caused by haze, dryness and weevil attack at the origins. China played a key role in boosting demand as the country switched to palm oil in increased quantities following poor demand for soyabean in the wake of African swine fever outbreak that led to culling of pig herds on a large scale.

But the most critical driver was the Indonesia biodiesel programme. The country has adopted an ambitious policy of using up to a fifth of its palm oil production for conversion into biodiesel to be consumed internally in 2020, blending 30 per cent palm biodiesel with mineral oil diesel. The programme begins in January. This one move itself is seen as boosting consumption demand for palm oil by as much as 2.5 million tonnes.

Production targets

It is in this background that one must see where palm oil prices would be headed in 2020. Without doubt, production growth will slow in 2020 because of low prices during most of the year resulting in lower fertiliser use; haze and shorter sunshine hours are the other issues. CPO production is likely to be 75.7 million tonnes showing a modest rise of 1.7 ml t. Indonesia’s contribution is projected to be 44 ml t (43 ml t) while Malaysia’s will remain unchanged at 20 ml t. Other origins will account for 11.7 ml t with Thailand contributing 3 ml t.

Hype and reality

In 2020, palm oil will be a demand side story. If anything, the CPO price movement is likely to hinge on the success or otherwise of the Indonesian blending programme. History tells us that governments usually set ambitious targets, but achievement becomes elusive. Often, hyped targets are intended to boost markets and confidence.

The Indonesian blending programme needs a close watch for signals about its performance. On the other hand, Malaysian blending program is rather small, accounting for just about 2-3 percent of its CPO production.

Image problem

There are risks associated with the palm oil market. The oil is under attack from industrialised countries. ‘Palm-free’ food label and third party (bankers, investors) pressure on corporates is reportedly enormous. The current rally is sure to attract greater scrutiny of sustainable practices. European Union’s Indirect Land Use Change targeting oil palm cultivation is a good example of how perceptions are being planted. Indonesia has, of course, filed a dispute at the WTO.

The CPO market is currently over-bought. Usually, it takes 3-4 months for the market to correct. Additionally, production is into the lean season which will last till March 2020. Importantly, there is speculation that Malaysian stocks will fall well below the two million tonnes mark and move towards 1.5 ml t.; but this author believes, stocks may not fall to that alarming a level but move close to 1.8 ml t mark.

In other words, the current price firmness may well continue into the first quarter of 2020. However, correction should commence early Q2 next year. Stronger signs of US-China trade deal will lift soyabean, and pressure palm oil down. The price correction is likely to be dramatic with CPO losing 10-12 per cent of its present value. Indian government’s concerns over unrestricted imports and their impact on domestic crops cannot be ignored either.

The writer is a policy commentator and commodities market specialist. Views are personal

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