Lower palm oil prices may help reduce global food costs

KUALA LUMPUR: Palm oil prices may extend their decline to the lowest level in more than nine months as supply climbs in Malaysia, the second-largest producer, potentially helping trim global food costs.

The tropical oil may tumble 7.9% to RM2,800 a tonne by Sept 30, a level last seen in early October, according to the median estimate in a Bloomberg survey of eight analysts. Inventories climbed 5.8% to 2.03 million tonnes in June and output increased 2.3% to 1.78 million tonnes, a separate survey of three analysts and two plantation companies showed.

Cheaper prices of palm oil used in instant noodles, margarine and soaps may cool global commodity costs, curbing inflation that has spurred more than two dozen countries to increase interest rates this year and containing expenses for Unilever and Nestle SA. Food prices tracked by the United Nations increased nine times in the past 11 months and in May, stayed near their record reached in February.

“The velocity of CPO production is unbelievable,” said Dorab Mistry, director of Godrej International Ltd, referring to crude palm oil. He correctly predicted last year that prices would climb to more than RM3,000. “I have never seen anything like this in Malaysia.”

Palm oil climbed to RM3,967 on Feb 10, the highest level in almost three years, as global demand outstripped supply before reversing to trade at RM3,040 yesterday, a 20% decline this year. The Standard & Poor's GSCI gauge of 24 commodities tumbled 7.8% last quarter as wheat dropped 20%, cotton slumped 41% and oil retreated 11%.

Production from Malaysia may reach 17.6 million tonnes this year from 17 million tonnes in 2010, said Plantation Industries and Commodities Minister Tan Sri Bernard Dompok in March. The palm-oil board may increase its forecast to between 18 million and 18.5 million tonnes, Ong Chee Ting and Chai Li Shin, analysts at Maybank Investment Bank Bhd, said in a report on June 28.

“Maybe in the near-term, we may see some weakness in production, as sometimes in the festive season, they have less harvesting, but it should come back after July-August,” Arhnue Tan, senior investment analyst at ECM Libra Capital Sdn, said by phone from Kuala Lumpur.

Muslims observe a day-long fast during the month of Ramadan, which precedes the Eid festival and may start on Aug 1.

Monthly production may climb as high as 2 million tonnes and stockpiles may reach 2.2 million tonnes, Tan said. Inventories of that size would be the highest since December 2009, according to board data. The peak production season is from June to October. The palm-oil board is scheduled to publish its estimates for production, stockpiles and exports last month on July 11.

Production climbed 14% to 1.74 million tonnes in May from April, the highest level in 19 months, the board said. Output jumped 15% to 4.69 million tonnes in the three months through May from 4.08 million tonnes in the year-ago period.

Supply from Indonesia, the world's biggest grower, is expected to keep expanding at 10% to 12% each year, the nation's trade minister Mari Pangestu said on June 13. The country may produce 25.4 million tonnes in the year beginning Oct 1, up from 23.6 million a year earlier, according to US government estimates.

“Production is expected to keep on increasing from now because the weather condition is being supportive and extraction is happening well,” Vimala Reddy, an analyst at Karvy Comtrade Ltd, said from the Indian city of Hyderabad, referring to the oil extraction rate from fresh-fruit bunches. - Bloomberg