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Palm Oil Stockpiles Expanding Adds To Record Supply
Perspective | 27 September 2013

Record inventories of palm in Indonesia, the largest producer, will add to the biggest global supply of vegetable oils in history, driving down costs for makers of everything from food to fuel to soap.

Indonesian stockpiles of the most-used oil derived from crops will rise 66 percent to 3 million metric tons by the end of 2013-2014, the US Department of Agriculture (USDA) says. Global output of nine oils including soy, peanut and palm will expand 4.3 percent to 167.3 million tons, USDA data show. Dorab Mistry, a director at Godrej International who has traded the oils for three decades, says futures may drop as much as 13 percent to RM2,000 (US$624) a ton by January, the lowest since 2009.

Palm oil rallied the most in almost three years last month as hot weather threatened the US soybean crop, which also yields oil used in food and fuel production. Both commodities are retreating again on prospects for a record harvest in Brazil and Argentina, the biggest shippers of soybean oil. Even with last month’s rally, palm never emerged from the bear market that began in June 2012 after the highest ever average prices the previous year spurred farmers to extend plantations.

“You’ve definitely got a lot of supply coming in, from Indonesia in particular,” said Chris de Lavigne, a global vice president at Frost & Sullivan in Singapore, who advises the palm oil industry and has tracked edible oils since 2006. “Although soybeans aren’t coming in at the levels that people expected it, it’s still going to be a very big crop.”

Lowest Level
Palm retreated 5.4 percent to RM2,306 on the Bursa Malaysia Derivatives in Kuala Lumpur since the start of January. It rose 7.5 percent last month as soybeans gained 13 percent, the most in a year. Rabobank International anticipates an average of RM2,250 in the last three months of 2013, the lowest level since the third quarter of 2009.

The Standard & Poor’s GSCI gauge of 24 raw materials fell 1.3 percent since the start of January and the MSCI All-Country World Index of equities advanced 14 percent. The Bloomberg US Treasury Bond Index lost 3 percent.

Indonesian output will rise 8.8 percent to 31 million tons in 2013-2014 after production more than doubled in a decade, the USDA estimates. It takes three to four years from planting for a tree to start yielding oil, according to the Indonesian Palm Oil Association. Stockpiles will as much as double to 4 million tons by the end of December, Mistry said in an interview on 12 September in Singapore. He is known in the industry as Mr Titanic after correctly comparing prices in 1998 to the ill-fated liner.

Soybean Oil
Farmers in South America will expand the amount of land they plant with soybeans, offsetting a smaller-than-expected US harvest, Goldman Sachs Group said in a 11 September report. The USDA cut its outlook for the US crop by 3.3 percent, while still forecasting a 4.4 percent gain from the previous season.

Goldman expects soybeans to trade at US$10.50 a bushel in 12 months, 20 percent less than now. Combined soybean-oil output from Brazil and Argentina will expand 9.2 percent to 14.2 million tons in 2013-2014, USDA forecasts show. The global soybean crop will expand 5.3 percent to a record 281.7 million tons, the department says.

Standard Chartered predicts a fourth-quarter average of RM2,450. Chandran Sinnasamy, head of trading at LT International Futures in Kuala Lumpur, who has tracked palm since 1989, said prices may climb as high as RM2,750 this year. The commodity trades at a US$212-a-ton discount to soybean oil compared with a US$181 average over the past five years.

‘Bearish Sentiment’
“Despite the bearish sentiment, palm oil is still supported by the huge discount,” Chandran said. Concerns about the soybean crop, demand for palm-derived biofuels and lower Malaysian stockpiles year-on-year may bolster prices, he said. Inventories in the second-biggest producer are 21 percent lower than a year ago, data from the Malaysian Palm Oil Board show.

Costlier crude oil may curb the slump in palm by making it more attractive to produce biofuels. West Texas Intermediate, the benchmark US crude grade, advanced 14 percent this year. Palm oil is the biggest feedstock for biodiesel after soy and 6.34 million tons are likely to be processed into fuel this year, 11 percent more than in 2012, according to Oil World, a research company based in Hamburg.

Indonesia raised the amount of palm-derived biodiesel that producers must blend into subsidised fuel to 10 percent this month from 7.5 percent. The requirement will be extended to non-subsidised fuel and industrial users in January and power plants will be obliged to use supply with a 20 percent blend. Increasing fuel demand will curb stockpiles, Tong Poh Keow, chief financial officer of Sime Darby, the world’s biggest listed producer, told reporters in Kuala Lumpur on 30 August.

Three Decades
Global supply will advance 5 percent to a record 58.1 million tons in 2013-2014, boosting stockpiles by 17 percent to an all-time high of 9.2 million tons, the USDA says. Production was 6.13 million tons three decades ago. The oil is used in everything from Nestle SA’s Maggi noodles to Unilever soap.

A 2011 report from the United Nations (UN) estimated that global plantations covered about 37 million acres (15 million hectares), an area equal to Illinois. The commodity, originally from the rain forests of West Africa, is now mostly grown in the tropical areas of Asia within 10 degrees of the equator.

Declining edible oil prices are helping to curb global food costs that the UN says fell in eight of the past 11 months. The Rome-based Food & Agriculture Organization’s index of 11 oils and fats declined 18 percent in the past year, compared with a 5.1 percent drop in the overall 55-food gauge.

Trillion Rupiah
Cheaper palm oil is reducing profit for producers, with Kuala Lumpur-based Sime Darby expected to report a 5.7 percent drop in net income to RM3.49 billion in its fiscal year ending 30 June, according to the mean of 25 analyst estimates compiled by Bloomberg. Shares of the company are little changed since the start of January.

PT Astra Agro Lestari, Indonesia’s largest publicly listed producer, will report a 25 percent profit drop to 1.813 trillion rupiah (US$162 million) this year, the mean of 27 estimates shows. The shares fell 1.8 percent since the start of January, trailing the Jakarta Composite Index’s 5.7 percent advance.

“Whatever downgrades there have been to the US soybean crop, the overall supply of oilseeds will still be significantly higher,” said Pawan Kumar, director of food and agribusiness research and advisory at Rabobank in Singapore. “The US crop is still better than last year.”

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