Will palm oil futures set a record high?
They got within range on Thursday, closing in Kuala Lumpur at 4,060 ringgit a tonne, up 1.0% on the day and their first close above 4,000 ringgit in 13 years.
Indeed, it was the fourth-highest finish ever for a spot contract, the record being the 4,330 ringgit a tonne recorded in March 2008, although on an intraday basis, the all-time top was the 4,486 ringgit a tonne reached in the following session.
Why are prices so strong?
As UOB analysts put it, “lower palm oil stocks, a delay in soybean harvesting in South America,” meaning a lag in extra supplies of rival vegetable oil soyoil, “and improved demand in major markets continue to be supportive to prices”.
This after Malaysian Palm Oil Board data on Wednesday showed the country’s stocks far lower than forecast, at their second lowest since April 2009, thanks largely to unexpectedly weak production, with Covid-19 restrictions denying Malaysian plantations the foreign workers they rely on.
There was not so much in the way of “improved demand” it has to be said, with Malaysia’s exports last month at a 14-year low, and shipments making a poor start to March – falling even below the February pace.
Still, there are ideas that this shortfall could be resolved too, giving extra solidity to the palm oil price rally.
‘Export demand will recover’
At CGS-CIMB Research, Ivy Ng, regional head of plantations research, forecast that while palm oil stocks may grow this month – as has happened in 12 out of the last 13 Marchs, reflecting the start of a seasonal upturn in production – growth this time will only be by 0.3%, leaving stocks at a still-low 1.31m tonnes.
“Exports could rise given palm oil price competitiveness against other edible oils and stronger demand” ahead of the Eid festival that marks the end of Ramadan.
MIDF Research too forecast that “export demand will recover”, thanks to the “gradual recovery of economic activities in India and China, and restocking activities ahead of the month of Ramadan”.
Indeed, looking “ahead, we still expect stockpiles to remain tight amidst lower CPO [crude palm oil] production given the weather uncertainties and higher export demand in the coming months”.
‘Price risk on the downside’
However, not all commentators are quite so upbeat, with Maybank Kim Eng seeing pressure ahead of prices, thanks to extra supplies of rival soyoil coming onstream as South America’s soybean harvest gathers pace.
“Assuming a decent weather in the northern hemisphere this summer planting, we do not discount the possibility of a record supply of soybean and soybean oils, which in turn will pressure vegetable oil selling prices by mid-year,” Maybank’s Ong Chee Ting said.
Then there is the seasonal pick-up in South East Asia’s palm oil output to factor in as well.
Indeed, “barring unforeseen weather disruptions, we believe the price risk will be on the downside in the second quarter, but more so in the second half of 2021 when output picks up strongly”, he said.
Short term vs long term
That last factor is something that MIDF agrees on too, foreseeing that the “CPO price will ease in the second half of 202 due to better production level (as a result of rainfall which will should boost palm oil fruit yields) and the rollout of Covid-19 vaccine in Malaysia (which will also overcome the labour shortage issue)”.
Given the number of unexpected events that have been thrown at ag markets over the last few months, such a decline is not guaranteed.
Yes, the potential for record prices over the next few days will be grabbing market attention.
But producers should lift their gaze to the horizon too, and not ignore figures which out to March 2022 remain above 3,300 ringgit a tonne – values which, for all but a handful of months of the past 40 years they would have walked over hot coals for.