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Recent floods have helped crude palm oil prices rise but low stocks will soon swell again

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At the end of June Malaysia’s inventories of crude palm oil (CPO) fell by 10.55%, according to the Malaysian Palm Oil Board (MPOB). At 1.7m tonnes, this is their lowest level in three years. Production of CPO there fell by more than 4%. Blame the weather.

 

This year’s monsoon across widespread areas of Asia has been very useful for India, despite floods. Parts of central, north and northeast of the country saw on average as much as six inches (15 centimetres) more rain than usual by mid-July. This inundation will help India’s kharif crops such as rice, cotton, groundnuts and others.

 

But is hasn’t helped others. In parts of Japan, Nepal, Bangladesh, and China the severe downpours have rendered millions homeless, disrupted farming, and contributed to food price inflation.

 

In China food prices rose by 13% in July, having gone up by more than 11% In June - prices for pork, China’s preferred meat - have more than doubled during the past 18 months as the country’s pig herd was slashed by African Swine Fever (ASF).

 

Meanwhile in central-south and southwest US and northern Europe there have been persistent drought conditions. Iowa, in the US Corn Belt, has been the driest since the extreme drought year of 2021. Germany’s wheat crop this year could fall 12% year-on-year to about 20m tonnes.

 

Flash floods

 

It is supposedly the dry season in Malaysia, which in normal years starts in May and lasts until September. Not this year. Flash floods have hit parts of the country, making transportation difficult. Unusually heavy rainfall has also hurt Indonesia’s CPO production, harvesting and exports - the country’s CPO stocks are thought to have dropped to 3m tonnes.

 

Malaysia’s exports of CPO in the first half of 2020 were 17% lower year-on-year; the country’s full-year CPO output is likely to be some 19m tonnes - more than 4% lower than last year - and its exports to be 18.5m tonnes. Malaysia’s competitiveness of its CPO against that of Indonesia - by far the world’s biggest CPO producer - has been helped by the suspension of the country’s CPO export tax until the end of the year.

 

Demand recovery

 

Forecasts of a strong recovery in CPO demand during the second half of 2020 are looking premature. Underlying demand from the biodiesel sector in Indonesia - which introduced B30 (30% blending of CPO with fossil fuels) this year - remains strong; and the Indonesian government has said it is pushing ahead to introduce a B40 blend by July 2021.

 

But the catering demand for palm oil remains subject to government responses to Covid-19.

 

India is the world’s biggest importer of edible oils. Palm oil is the most widely used and imported edible oil there, accounting for 9m tonnes, more than two-thirds of edible oil consumed. It is mainly used by bulk buyers such as restaurants and food processors.

 

Competing edible oil prices (canola particularly) are high as is demand - in China, for example, pig farmers need to re-stock herds and this will push the country’s soybean demand in the coming quarter.

 

India is now slowly unlocking its economy but the pace of recovery is uncertain - it has just become the third country to pass 2m Covid-19 cases. Millions have lost their jobs and will not be able to dine out for many months. CPO output may have slowed - but demand is not growing fast either.

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