Palm oil price to rise, says VSA, flagging production doubts

(Agrimoney) – Falling production estimates are poised to push palm oil prices higher, with the impact of El Nino potentially providing a further boost, VSA Capital said, as futures extended a recovery to close at their highest in nearly two months.

Official forecasts in Indonesia, the top palm oil producing country, and second ranked Malaysia are “likely to be decreased”, even before factoring in any El Nino effects, VSA said.

While Gapki, the Indonesian palm oil association, has forecast a 4.8% rise in domestic output to 32.5m tonnes this year, this forecast appears “quite optimistic” given the weak production in the January-to-March period as revealed by palm oil groups.

“The impact of the extreme dryness in some regions of Indonesia 12 months ago on fresh fruit bunch crops is clear,” VSA said.

Malaysian production trimmed

In Malaysia, while the Malaysia Palm Oil Board has trimmed its forecast for output of the vegetable oil to 20.1m tonnes, a rise of 2.0% year on year, this figure too may “might also be revised down again” given the dire start to 2015 for output, VSA said.

Malaysian production in the January-to-March period fell by nearly 12%, after reflection of floods disrupted transport and production.

Meeting even the revised MPOB forecast “would require a historically high proportion of the country’s production to come in the final three quarters of the year”.

El Nino prospect

And this is before factoring in any allowance for El Nino, which has a history of bringing undue dryness to South East Asia, although the effects of the weather pattern may take some time yet to become apparent.

VSA noted that a strong El Nino in 1982 preceded a drop of 10.4% in Malaysian crude palm oil yields the following year.

“The 1997 event had an even more dramatic impact on yields, with the average crude palm oil yield falling 16.8% year on year in 1998,” VSA said.

“This caused palm oil prices to spike by more than 16% during 1998.”

Price boost

VSA forecast palm oil prices averaging $700 a tonne in the Dutch port of Rotterdam in 2015, compared with a current price of $665 a tonne, and an average of $679 a tonne so far this year.

There is potential for a stronger price, if El Nino indeed develops as meteorologists expect.

“Confirmation of El Nino in the second half of 2015, a continued shortfall in production and/or a sustained boost to exports would likely boost palm oil pricing significantly, resulting in an average well above our estimate,” the broker said.

The comments came even as futures in Kuala Lumpur rose for a fifth successive day, this time by 0.4% to 2,216 ringgit a tonne, the best close since early April, and taking the week’s overall gains to 3.8%.