AmResearch maintains overweight on CPO

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KUALA LUMPUR: AmResearch is maintaining its overweight call on crude palm oil (CPO) despite the mixed views on price following the Palm Oil Conference in Kuala Lumpur. In its summing up of the second day of the conference, the research house said only Thomas Mielke from Oil World was more optimistic about CPO prices. Mielke told the conference on March 12 that CPO price would average US$640/tonne or RM2,368/tonne in 1H2009. He added world palm oil exports were expected to increase 7% from 32.8 million tonne in 2007/08 08 to 35.2 million tonne in 2008/09F. This is about 56% of world exports of oils and fats in 2008/09F.  He believed world consumption of palm oil would exceed supply in 2008/09F, resulting in a five-year low stock/usage ratio of 15.2% (2007/08: 16.8%). One major driver of palm oil demand would be the decline in production of soybean oil.  Demand for soybean meal in the US had been poor due to the economic recession and as such, soybean crushings have been scaled back. This has caused a decline in soybean oil output, resulting in some switching to palm oil. Political uncertainty in Argentina is also expected to affect world soybean production. Due to the farmers dispute with the Government on the country’s export tax on soybean, there is risk that growth momentum in Argentine agriculture would be lost.  According to Mielke, farmers could lose the willingness to invest in farm equipment and plantings, resulting in stagnation of the country’s agriculture over the long-term. An industry expert from Indonesia forecast Indonesia’s CPO production rising to 22.4 million tonnes in 2009F from 18.6 million tonnes in 2008. Ending inventory in Indonesia is estimated at 3.3 million tonnes in 2009F compared to 2.7 million tonnes in 2008. CPO would trade between RM1,550/tonne to RM2,000/tonne in the next three to four months, according to the Indonesian official. LMC International’s Dr James Fry pointed out that stripping out effects of inflation, the real price of CPO fell 2.4% annually from 1950 to 2005. Overall, rates of decline of real prices of agricultural commodities ranged between 0.5% to 2% per anum from 1950 to 2005. Fry said CPO prices would still be influenced by energy prices and believed CPO would trade between RM1,400/tonne toRM1,500/tonne. Although he expects CPO inventory in Malaysia to fall to 1.5 million tonne, he believed that this would largely be seasonal. He noted that this would not result in a tight supply situation. However, India’s Dorab Mistry expected India’s imports of vegetable oil to increase to 7.1 million tonne in 2008/09F from 6.3 million tonne in 2007/08 mainly due to the elimination of import duties on CPO by the government in India. India’s imports of palm oil is forecast to climb to 5.6 million tonne in 2008/09F from 5.3 million tonne in 2007/08.  Globally, Dorab believed world demand for vegetable oils would fall faster than supply. He expected world supply of vegetable oils toexpand by 4.7 million tonne in 2008/09 compared to the increase in global demand of only 2.5 million tonne. Dorab said prices for CPO futures will cross RM2,000/tonne in the coming few weeks and may briefly challenge RM2,100/tonne. But prices for CPO are envisaged to fall to RM1,500/tonne in 2H2009 due to higher production of palm oil and soybean.