Plantations sector
Maintain neutral: Total crude palm oil (CPO) output in November 2009 plunged worse than expected by 19.6% month-on-month (m-o-m) and 3.8% year-on-year (y-o-y) to 1.59 million tonnes, the biggest monthly drop in almost three years.

The Reuters poll of plantation houses anticipated a smaller decline with the total output estimated at around 1.7 million tonnes. In addition, the year-to-date (YTD) 2009 output stood at 16.04 million tonnes vis-à-vis corresponding with the YTD 2008 figure of 16.25 million tonnes, a decline of -1.3% y-o-y.

The lower output coincided with the end of high production season, but the main reason behind the extremely poor showing were problems associated with bad weather conditions. While the severe rain spell earlier this year impacted mostly the states of Sabah and Sarawak, the recent heavy rains engulfed almost the entire country.

Output fell sharply from record levels in October due to heavy rains and  floods which hampered the evacuation of fresh fruit bunches (FFB) and impeded the delivery of CPO out of the estates to the refineries.

To compound the trouble, water content has been rising and some plantations had to offload CPO at a discount of between RM200 to RM300 per tonne as the moisture content has gone up from the usual 0.25% specification.

Nevertheless, total exports were higher as major importers were buying to make up the shortfall in domestic oilseed output.

Total exports in November 2009 were higher at +1.4% m-o-m and +10.0% y-o-y to 1.50 million tonnes. The YTD 2009 figure was also higher at +6.2% y-o-y to 14.65 million tonnes. Higher total exports were due to higher purchases particularly by the Chinese and Indian importers. In November 2009, Malaysia’s CPO exports to China and India increased by +20.6% and +10.8% m-o-m respectively.

The increased purchases from the Chinese buyers was partly due to the expectations, as recently reported by the US Foreign Agricultural Service (USFAS), that China’s soybean output may fall after drought and cold weather damaged crops. USFAS also reported that India’s soybean harvest may shrink -3.8% to 8.75 million tonnes on late planting and dry weather, hence the heightened pace of stockpiling activities by the Indian importers.

We are positive on the medium-term outlook for CPO from now onwards and into 2010. We based our view on the premise that it is the end of high production season as output reached its apex in October 2009.

Also, continued stockpiling activities by some of the major importers and the general bullishness of the world’s commodities market would be the main factors working in favour of CPO prices going forward. In addition, the El Nino indicators are above thresholds and, based on our in-house calculations, are on the verge of an El Nino occurrence.

Thus we expect CPO prices to remain firm during the remainder of 2009 and into the 1Q10 before coming under pressure as the South American soybean harvest begin in 2Q10. We also reiterate our CPO price forecast for 2010 at RM2,450 per tonne.

In fact, if the El Nino indicators continue to strengthen and the general bullishness of the world’s commodities intensify, we see more upside than downside risk to our CPO forecast for 2010.

At this juncture, we retain our neutral view on the plantation sector. While we are not bearish on CPO prices, we believe it is a bit premature to upgrade the sector to an overweight at this moment due to the prevailing relationship between the plantation stocks and the benchmark index.

The share prices of plantation stocks were generally highly correlated to the trend or direction in CPO prices. However, unlike in the previous years when the plantation stocks and CPO moved almost hand in glove, the KL Plantation Index had instead been tracking the benchmark KLCI since mid-January.

We are keeping a close watch on this, but until and unless the relationship between plantation stocks and CPO begin to re-establish, our neutral view on the sector remains. — MIDF Research, Dec 11