The world's top-two palm oil producing nations have both pinned their hopes for this year's production about 1m tonnes too high, a leading analyst has said, flagging potential El Nino damage.

Dorab Mistry rejected official forecasts that Malaysia's production will rise by 500,000 tonnes to 18.1m tonnes, saying that the hot spell caused by the El Nino weather pattern will limit output to 17.2m tonnes.

Hot weather tends to curtail the development of the female flowers which go on to produce the oil-rich palm seeds.

"I expect a similar situation to prevail in Indonesia too," Mr Mistry, the head of vegetable oil trading at Godrej International, added, while noting that higher plantings would mitigate the effects of hot weather in the top-ranked producing nation.

Indonesia's palm oil production, which the government forecasts rising 2m tonnes to 23m tonnes, would in fact grow by only 1m tonnes, Mr Mistry told a conference in Kuala Lumpur.

Soyoil factor 

The output shortfalls would help palm oil prices trade in a range of 2,800-3,200 ringgit a tonne after July, when a decline in South American soyoil exports would also come into play.

Soyoil is a palm oil's main competitor on vegetable oil markets, with both being interchangeable for many biodiesel and food processing uses.

While Argentina and Brazil are expected to produce record soybean production from harvests early in 2010, soyoil exports are expected to be constrained by growing domestic demand from biofuel plants.

"The peak soyoil flow from South America should be in the period May to August," Mr Mistry said,

"Therefore, I expect crude palm oil futures post-July to scale new heights... in order to ration demand."

Market reaction 

However, palm oil would, for now, trade within the range of 2,600-2,800 ringgit a tonne, he said.

The forecast failed to support Kuala Lumpur prices, which have enjoyed a run-up of 11% since late January on expectations of a slowdown in Malaysian production, which would foster the erosion of stocks.

The benchmark May contract closed down 2.2% at 2,650 ringgit a tonne.