Malaysian palm oil production sharply lower due to drought

Palm oil production in Malaysia, the world's second ranked producers, is sharply down year on year, in the wake of regional droughts.

Malaysian palm oil production was down 23% year on year in April, at 1.3m tonnes, the Malaysian Palm Oil Board said.

The palm oil fruit crop is under pressure, after some very dry weather resulting from the recent El Nino effect, which is associated with droughts in Malaysia and Indonesia, from where most of the world's palm oil originates.

Falling stocks, but also exports

The fall in Malaysia production helped push palm oil stocks to their lowest level since February 2015.

Malaysian inventories were down 4.5% month on month, at 1.80m tonnes. This is a 17.5% fall from April last year.

The decline in stocks was faster than expected, with analysts forecasting a 3.5% drop.

But weak exports slowed the decline in stocks. Exports stood at 1.16m tonnes, down 12.8% from the previous month.

"It's positive to see the stockpiles shrinking," Ed Hugo, at VSA Capital, suggesting that the data would add short term support to palm oil prices.

United Plantations production slumps

Mr Hugo said the fall off was not "so surprising," given the sharp decline in production reported by United Plantations on Monday.

United Plantations is seen as a benchmark producer, so a 27.5% year on year drop for April suggested that serious damage had been done to national output.

The ramifications of El Nino on palm oil production will continue for at least the rest of the year, Mr Hugo said.

And if El Nino swings into La Nina, as many expect, the rains that could appear in the region will not bring any immediate relief, and could even slow production due to flooding, he noted.

Soyoil keeps cap

Still, Mr Hugo said that soyoil prices would continue to keep a cap on palm oil prices.

"Soyoil oil is being favoured", he noted, and record imports of soybeans to China are encouraging crushing there.

As Edward Hugo points out, demand for soybean meal, for use in animal feed, remains "robust", so there is an incentive to continue processing soybeans.

And soyoil exports from Argentina are booming, after reforms by president Mauricio Macri.

So despite some recent strength in soyoil, helped by a broad commodities boom and Argentine soybean harvest disruptions, gains for palm oil are still being limited.

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