The 20% surge, month on month, in Malaysian palm oil output in July was something
of a one-off.
At least, that's what traders appear to be betting on.
Palm oil futures for November stood 1.4% higher at 2,749
ringgit a tonne in Kuala Lumpur as of 10:00 UK time (04:00 Chicago time), after
earlier touching 2,771 ringgit a tonne, the highest for a benchmark contract in
And the buying is being attributed largely to talk of palm
oil output in Malaysia, the second-ranked producer of the vegetable oil, not
seeing quite the increase that investors are counting on.
In Chicago, Terry Reilly at Futures International
highlighted "talk of 2017 production coming in less than expected", while Malaysia's
Oriental Pacific Futures flagged "forecasts of slower-than-expected output
And this despite a forecast from the Malaysian Palm Oil
Board on Monday that the country's production would hit 20m tonnes in 2017, a
figure at the upper end of a range of industry estimates made earlier in the
year, and a putting the potential for record output.
(The current all-time high, of 19.96m tonnes, was set in 1996,
before dryness blamed on El Nino told on oil palm yields.)
Production of 20m tonnes would represent a recovery of 15.5%
year on year, implying some acceleration from the average pace of growth so far
in 2017, of 14.9%, up to the end of July.
Indeed, output would have to come in at approaching 9.5m
tonnes over the August-to-December month, beating the 9.10m tonnes seen in 2015
for this period.
(The current record for the last five months of a calendar
year was actually the 9.28m tonnes set in 2012.)
Soyoil vs palm oil
What bulls may be banking on is the potential of the Malaysian
Palm Oil Board figure not being reached.
July-to-December output would have to rise a huge 16.1% year
on year to bring full-year output to 20m tonnes, and there are many ideas that
labour shortages, as much as palm tree productivity, may make this tricky to achieve.
And there are other factors to price in too – including a
recovery in the discount of palm oil on futures markets to rival soyoil, which stood at 34.31 cents a
pound in Chicago for December delivery, a price advantage of more than $114 a
tonne over Kuala Lumpur's November palm oil contract.
Soyoil prices have been supported by some tightness in US
supplies, with industry data last week showing US stocks at 1.558bn pounds last
month – down from 1.703bn pounds at the end of June, and 1.743bn pounds at end
of July 2016, besides being well below market forecasts of 1.623bn pounds.
Futures International's Terry Reilly said that on export
markets "US Gulf soyoil was last running at about $144 a tonne over Malaysian
RBD palm oil as of late last week".
'Buying into this
Furthermore, there was a strong performance overnight by palm
oil futures on China's Dalian exchange to factor in, with the best-traded
January contract ending 1.3% higher at 5,508 yuan a tonne, a five-month closing
Still, China, a huge buyer of palm oil, will provide a test
of the palm oil rally later this week, with its monthly import statistics.
The US could see a test of vegetable oil markets later on
Tuesday, with some reports of an announcement by the US Department of Commerce
over imports of Argentine and Indonesian biodiesel, which could have big implications
for vegetable oils (from which biodiesel is made).
In the soyoil market at least, "some traders have been
buying into this decision," Mr Reilly said.
December soyoil, at 34.31 cents a pound, was up 0.4% in
Chicago on the day, and by nearly 4% over the past week.
The main Chicago contracts were higher too, with soybeans themselves up 0.3% at $9.39 a
bushel for November delivery, and December corn
futures nudging 0.1% higher to $3.63 ˝ a bushel.
The gains came despite US Department of Agriculture data
overnight confirming some improvement in US soybean crop condition, with the proportion
rated "good" or "excellent" adding 1 point week on week to 60%.
For corn, the figure remained at 62%.
However, the headline data disguised deteriorating in some
key states, with the Illinois and Indiana soybean readings down 3 points, at 60%
and 53% respectively. (The Iowa rating gained 2 points to 58%.)
For corn, the Illinois reading slumped by 8 points to 54%, with
that in Indiana down 2 points and 53%, while the figure for Iowa, the other of the
so-called "I states", unchanged at 61%.
With the I states viewed as particularly important for US
harvest prospect, and dryness a worry in parts of Illinois, the data touched a
Benson Quinn Commodities noted that a crop tour by a large
Illinois co-operative "late last week are indicating a decline in production of
from 3% to as much as 30% versus last year's crop, or an average of 15% off
The broker added that "a lot of variability exists across
virtually across all of the Corn Belt" – which is putting special emphasis on
the Farm Journal (ie ProFarmer) Midwest crop tour, one of the most closely watched.
How that perceives Illinois crops will be particularly closely
Wheat futures also nudged higher in Chicago, by 0.2% to $4.38
a bushel for December delivery, helped by rival grain corn, and by fresh
worries over the Australian crop.
"Australia's eastern grain regions saw very low temperatures
over the weekend," said Tobin Gorey at Commonwealth Bank of Australia.
"The market consequently is worried about, another, source
of crop damage," beyond ongoing dryness.
…thinking of which, "weather forecasters are not paying any
further attention to the weather models suggesting a rain event for the dry
north eastern grain regions," Mr Gorey said.
"The event remains in the model projections, but the implied
rainfall is modest."
Not that Paris wheat futures managed to join in the gains,
easing 0.2% to E159.75 a tonne in early deals, amid ideas that European Union
exports are uncompetitive against Russia's surging supplies.
"EU wheat offers aren't competitive," said Benson Quinn
"I mean $15-20 a tonne from competing with Black Sea values.
"This going to have to change if they have any interest in
doing business with anyone other than Algeria."