This article first appeared in The Edge Financial Daily on July 6, 2017

Agribusiness sector
Maintain neutral: Findings from a survey of 17 plantation areas by the CIMB Futures team reveal that Malaysian crude palm oil (CPO) output likely fell 5.2% month-on-month (m-o-m) to 1.57 million tonnes in June.

Palm oil exports likely fell by around 8% m-o-m, based on export statistics released by Societe Generale de Surveillance (SGS) and Intertek Testing Services.

Overall, we estimate that Malaysian palm oil inventories were flattish at 1.55 million tonnes at end-June. The official figures will be released on Monday.

The projected 5% m-o-m fall in fresh fruit bunch output is lower than the historical June average m-o-m rise of 1.9% over the past five years, and weaker than our earlier projection of a 2% m-o-m fall in output due to festive holidays.

Year-on-year (y-o-y), we estimate CPO output likely improved by 2% in June. This would represent the seventh consecutive month of y-o-y rise in output. However, our estimated production for June is 11% below the June 2015 output (pre-El Nino impact).

We estimate that Malaysian palm oil exports fell by around 8% m-o-m in June, based on estimates from cargo surveyors SGS (-7.6% m-o-m) and Intertek (-8.9% m-o-m). This is worse than our earlier projection of a 2% m-o-m decline in exports.

The weaker exports in June were due to weaker demand from China, India and the European Union as the consuming countries might have stocked up ahead of the Ramadan festival.

We also carried out a survey on planters’ preliminary views on July production. The survey revealed that plantation companies were more optimistic about production prospects for July, and were guiding for higher output growth as harvesting activities picked up in some plantation areas from the previous month after workers took time out to celebrate the Hari Raya Aidilfitri festival in June.

Average CPO prices in June fell 4% m-o-m to RM2,686 per tonne while the average palm kernel prices saw a sharper decline of 7% m-o-m to RM2,005 per tonne.

As a result, first half of financial year 2017 (1HFY17) CPO price averaged at RM2,944 per tonne (+18% y-o-y). We project weaker CPO prices in 2HFY17 due to seasonally higher palm oil supply.

This and projections of higher soybean supply from the US are key bearish factors for palm oil prices. The key positives are tighter palm oil stocks in producing countries versus a year ago and higher biodiesel mandates.

There is downside risk to the current spot CPO price of RM2,628 per tonne as we project CPO prices to average RM2,600 for the full year. However, CPO prices could exceed our projections if the recovery in palm oil supply is not as strong as expected due to labour shortages or weather risks. — CIMB Research, July 5