Palm oil prices set for correction

Despite all the hype about slowing palm oil production growth and robust export demand as well as tremendous holding power generated by record producer-profits in the last two years, palm oil prices have softened recently.

The market participants in major origins have been not been able to arrest the price correction despite efforts to keep the market well supported.

How low palm oil prices can go is the question everyone is now asking. Current indications are that it could decisively breach (Malaysia ringgit) MYR 3,000 a tonne and on occasions test MYR 2,700/tonne if the financial market woes and global growth concerns persist.

It is, of course, known that the ongoing financial market crisis has engulfed the commodities market and has led to price collapse in a number of energy products and metals. Some of the agricultural commodities where flow of speculative capital has been high have suffered too in the recent sell-off.

Importantly, contrary to the general impression sought to be created from time to time, production of palm oil in both Malaysia and Indonesia has been high in the second quarter of this year. Additionally, volumes of imports into key consuming markets – India, for instance – have been disappointing.

The twin effect of higher output and slowing export demand means the palm oil market is most likely to get into a state of surplus for the season ending September 2011.

According to the USDA, world vegetable production in 2010-11 is projected to expand by a healthy six million tonne to a new high of 146.3 mt. Of the increase, contribution of palm will be 1.8 mt with annual output expanding to 47.6 mt. Projected ending stocks are 4.5 mt.

While Malaysia's palm oil output growth this year is disappointing, it has been more than offset by a robust expansion in Indonesia to a new high of 23.6 mt.

What's more, world palm oil production in 2011-12 is projected even higher at 50.3 mt with Indonesia (25.4 mt) contributing to exactly half of the world output with an incremental production of 1.8 mt.

The market has taken cognizance of the emerging situation where the marketing year 2011-12 will also see a surplus. So, major consuming countries are sure to moderate their pace of purchase so as to benefit from further likely softness in palm oil prices.

Currently, the world is witnessing demand in the wake of ongoing festival season which would extend till October, especially in Asia.

By then the next harvested oilseed crops would hit the market adding to supply pressure. So, any strength in the short term due to festival demand will peter out soon and is unlikely to be sustained.

Given the current and emerging situation, analysts have readily cut palm oil forecast prices by about 10 per cent. Of course, weather over the next two months as well as planting conditions in South America later in the year need to be watched.

One can expect palm oil prices to be range-bound with a strong downward bias over the next few months. An average price of MYR 3,000 a tonne for the last quarter of 2011 would mean the market can trade between MYR 2,700 under normal conditions and MYR 3,300 a tonne under unexpected bullish developments.

It is important that Indian palm oil buyers exercise restraint and not rush into the market that is seen correcting.

Of course, many importers are forced to strike current import deals simply to pay for past imports.

This vicious cycle of more imports in order to pay for past business must come to an end if need be through an official diktat. Only then will there be genuine price discovery for palm oil.

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