Bloomberg quoted Nirgunan Tiruchelvam, an analyst at the bank, as saying: “The worsening Argentinian drought has led us to increase our crude palm oil price forecast.” Palm oil has averaged about US$593 a tonne so far this year, according to Bloomberg data.

CPO for August delivery on Bursa Derivatives closed RM75 higher at RM2,505 per tonne yesterday.

Soybean oil and palm oil are substitutes, and trends in soybean oil prices can lead to changes in the tropical commodity. In a report, Tiruchelvam raised earnings estimates for oil palm growers, including Sime Darby Bhd, the world’s biggest producer.

He also raised earnings estimates and share-price targets for Kuala Lumpur Kepong Bhd (KLK), IOI Corporation Bhd, PT Astra Agro Lestari and Golden Agri-Resources Ltd. Sime Darby “stands out” and the company’s stock was “undervalued,” he said.

The plantation stocks were mixed yesterday. Among the gainers, KLK rose 20 sen to RM11.90, Boustead Holdings Bhd gained 10 sen to RM4.52 while United Plantations Bhd rose 10 sen to RM12.20. Sime Darby fell 10 sen to RM6.75 and IOI Corp was down six sen to RM4.62.

The drought in Argentina, the largest exporter of soybean oil, was the worst in 43 years, and soybean production in the US, the largest producer and exporter of the oilseed, may be the worst in five years, Tiruchelvam said.

“We expect the soybean stock-usage ratio to fall to the lowest in a decade, driving up the price of soybean oil,” Tiruchelvam wrote in a report, which was dated yesterday. Soybean oil, crushed from soybeans, may average US$1,100 a tonne this year compared with a previous estimate of US$866, he said.

Palm oil prices may also be driven higher if the H1N1 flu becomes a pandemic and leads to a cull of hogs, reducing demand for soybean meal and curbing soybean oil supplies, he said. This was described in the report as an “extreme scenario”.

This article appeared in The Edge Financial Daily, May 28, 2009.