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ANALYSIS: Higher oilseed demand explains a lot of the palm oil price rally but...

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Crude palm oil prices are on a roll, gaining 9.6% last week on the Bursa Malaysia Derivatives exchange, the sharpest weekly rise since five years ago.

 

Last Friday the benchmark palm oil contract for December closed up 107 ringgit per tonne at 3,082 ringgit ($749.88) per tonne, its highest since mid-January.

 

Today however the price paused for breath, falling more than 2% and closing at 3,008 ($730.10) ringgit per tonne, tracking to some extent lower soybean prices.

 

Nevertheless, the crude palm oil price (CPO) has risen more than 40% from its low of 2,023 ($491.56) ringgit per tonne at its lowest point in May this year. What’s behind this rally?

 

Partly the short-term spike is to do with China’s annual Golden Week holiday which officially starts on 1 October. More than 700m Chinese criss-crosss the country to visit friends and family; all this internal tourism is normally a boost to the economy, which was the original intention for this holiday week.

 

On-the-move food consumption will rise, and demand for edible palm oil, used in cooking, will go up too. This demand boost may be short-lived. China is the second-biggest palm oil importer after India.

 

But there are other reasons too, providing a longer-term price boost.

 

Oilseeds on the rise

 

Edible palm oil competes with other oilseeds and it has been boosted by the strong rally in soybean prices, up by 11% since early January this year on strong Chinese imports, and a similar rally in soyoil prices.

 

In the week ending 15 September money managers boosted their net long position in CBOT soybean futures and options by 17,867 contracts from the previous week, according to the CFTC. Fund buying of soybean futures is now close to its all-time high of 253,889 contracts, of the week ended May 1 2012.

 

This heightened investors’ interest in soybeans derives from clear evidence of strong Chinese demand - as of September 18, China had bought US soybeans in each of the past 11 days.

 

Also supportive of soybean and soyoil was the news that according to NOPA (the US National Oilseed Processors Association) the soybean crush in the US in August fell by almost 5% month-on-month to 165.055m bushels, below market expectations.

 

Labour and La Nina

 

A further and more fundamental factor is the continuing labour shortage in the second-biggest CPO producer, Malaysia, which depends on migrant workers to harvest the palm oil.

 

The Covid-19 pandemic has halted recruitment of those labourers, and Malaysia has turned to its prisons to find workers. Malaysia’s CPO and palm oil products’ exports for 1-20 September rose by 9.4% to 1,035,041 tonnes compared to 1-20 August, according to Intertek Testing Services.

 

Indonesia, the world’s biggest CPO producer, is expected to see its CPO exports fall by 18% this year compared to last, at 24.92m tonnes, as a result of slower economic growth. Indonesia is also considering increasing the subsidy for its ambitious biodiesel programme, probably by increasing its levy on CPO exports, which would make Malaysia’s exports more competitive.

 

Both countries will also be worrying about the onset of La Nina weather conditions later this year, which will weaken the CPO harvests.

 

The additional rainfall and cooler temperatures can reduce pollination, leading to a reduction in the mean fruit bunch weight, as well as disrupting harvesting.

 

While CPO prices will continue to erratically track those of soybeans and soyoil, they have some independent spirit in them thanks to production problems.

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