Palm oil futures seen climbing by Oil World as tree yields drop

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(Nov 5): Palm oil prices are forecast to rise as tree yields in Malaysia and Indonesia have started falling on the delayed effect of drought early this year, industry researcher Oil World said.

Palm oil futures may reach 2,500 ringgit ($749) a metric ton in the first quarter of 2015, the Hamburg-based company wrote in an e-mailed report. The price of the vegetable oil may rise relative to fossil fuels in coming months, Oil World said.

Palm oil for January delivery closed at 2,308 ringgit today on Bursa Malaysia, up 15 percent from a Sept. 2 intraday low. Futures have slipped 11 percent in the past 12 months, compared with a 19 percent slide for Chicago soybean oil futures.

“In the near term we are likely to see the repercussions of the drought in early 2014, and the partly severe dryness now reccurring in parts of Indonesia and Malaysia will probably again affect palm oil output in mid-2015,” Oil World said.

Oil World said palm oil prices have “clearly strengthened” compared to crude mineral oil in the past four weeks. Brent futures fell about 10 percent in the past month, compared with a 6.4 percent gain for palm oil futures.

Palm oil, used in processed foods including margarine, can be used to produce biodiesel for use as a transportation fuel or in fuel blends. Widening premiums of palm oil and other vegetable oils relative to fossil fuels are expected to discourage “discretionary blending,” Oil World said.

“Crude palm oil futures increased pronouncedly since mid- October,” Oil World said. “At the moment we hesitate to further raise our price target, considering the recent weakness in energy prices.”

Indonesian Dryness

Palm oil yields per tree fell in Malaysia and Indonesia since September following dryness in the January-to-March period, the researcher wrote.

Parts of central and southern Sumatra and Kalimantan, important palm-growing regions of Indonesia, suffered from dryness in recent weeks, while parts of Malaysia had below- normal rainfall in September and the first 20 days of October, Oil World said.

Rainfall in southeast Sumatra and the southeast tip of Kalimantan, on the island of Borneo, received less than 20 percent of normal rainfall in the 30 days through Nov. 2, according to data from World Ag Weather.

Malaysia’s palm oil production may fall by 340,000 tons to 19.8 million tons in the season through September 2015, Oil World forecast. Indonesia’s output is predicted to climb by 2 million tons to 31.9 million tons as an increase in mature palm area makes up for a drop in yields, according to the report.

Dominant Producers

Palm oil production will show a “moderate” rise in Colombia, Papua New Guinea and Africa, Oil World predicted. Indonesia and Malaysia will remain the dominant producers, accounting for 85 percent of global output in 2014-15.

Crushing of rapeseed and sunflower seed, both relatively high oil-yielding seeds, is expected to drop in 2014-15. That will increase dependence on soybeans, which contain only 18 percent to 19 percent oil, according to Oil World.

“There will be enough soybean supplies in the foreseeable future, but soybeans alone cannot prevent a deficit in vegetable oils,” the researcher wrote.

World consumption of palm oil is forecast to rise by 3 million tons in 2014-15 from a year earlier, with import demand rising by about 2.2 million tons. World palm oil stocks are expected to drop to 10 million tons at the end of September 2015, equivalent to 16.3 percent of annual use.