Palm Oil Rallies on Concern That Demand May Outpace Production

Aug. 20 (Bloomberg) -- Palm oil futures rallied on concern among analysts that supplies from Indonesia and Malaysia, the largest producers, will fall short of expectations.

Unless there is an improvement in oil-palm yields, which are typically larger in the second half, a period of lower than expected production may coincide with rising demand as the global economy recovers, analysts said.

“Production, due to weather, poor fertilization practices in the second half of 2008, and government replanting initiatives, will still come in below 2008 levels,” said an ECM Libra Research report today. “Exports are cyclically stronger in the second half of the year and we believe that the strength will be exacerbated by the drought in India and also more pre- festival stocking initiatives taken on by Pakistan.”

November-delivery palm oil rose as much as 2.2 percent to 2,349 ringgit ($665) a metric ton on the Malaysia Derivatives Exchange and traded at 2,345 ringgit at 11:31 a.m. local time.

Prices have gained 7.1 percent this month and 38 percent this year amid speculation an economic recovery will sustain demand even if oil palm production climbs to a record, as the governments of Indonesia and Malaysia have forecast.

The outlook for palm oil also improved after about one- quarter of soybean crops in Argentina, the biggest exporter of soybean oil was destroyed by drought. Soybean oil is the second most-consumed edible oil.

Bullish Outlook

ECM Libra today reiterated its “overweight” view on plantation stocks based on the outlook for palm oil prices, echoing a separate report from CLSA Group this week that cited “China and India’s great hunger” to feed the world’s most populous countries. Palm oil is the world’s cheapest edible oil.

Vegetable oil imports by India may climb to a record as the lowest rainfall in five years threatens to damage oilseed crops and worsen a shortage, a processors’ group said on Aug. 13. Purchases in the year ending Oct. 31 may jump 27 percent to 8 million tons, the Solvent Extractors’ Association of India said.

Koh Miang Chuen and Conrad Werner, analysts at Morgan Stanley Asia (Singapore) Pte., this week said palm oil prices may average $700 a ton in the second half, compared with $612 a ton in the first half, aided by demand during the holy Muslim month of Ramadan, which starts in August.

Both Indonesia and Malaysia, which account for 90 percent of world palm oil output, are predominantly Muslim, and expanding domestic demand during Ramadan would crimp supplies for export.

Malaysian palm oil output climbed 3 percent in July, the slowest pace in three months, to 1.49 million tons, while exports gained 13 percent, the country’s palm oil board said.

So-called tree stress, which cuts yields, had curbed output in Malaysia, the second-largest producer, and Indonesia after last year’s record output and wet weather in the early part of the year.