Palm Oil May Decline as Malaysia Output Grows, KL Kepong Says

June 25 (Bloomberg) -- Palm oil prices may extend declines as production in Malaysia picks up, the country’s third-largest listed plantation company said.

“We are moving gradually into higher production in Peninsular Malaysia,” with output in Borneo’s Sabah state expected to increase from August, Roy Lim, a director Kuala Lumpur Kepong Bhd., said in an e-mail interview. “We expect yields to rise up till October or November,” Lim said.

Rising production may extend a drop in palm oil futures, which have lost 10 percent this year amid a record global crop of rival oilseeds. Palm oil for September delivery on the Malaysia Derivatives exchange closed at 2,390 ringgit ($738) a ton in Kuala Lumpur yesterday.

About 90 percent of palm oil, the world’s cheapest edible oil, is produced in Indonesia and Malaysia. Dry weather late last year and early this year caused by the El Nino weather phenomenon stressed oil palms, helping drive a 57 percent rally in prices in 2009.

So far there is “not much supply pressure yet as stocks are low, but they will gradually increase,” Lim said. While prices must fall to stimulate demand, “low stocks and festive demand will ensure they do not crash,” Lim said. Oil palms usually produce about 55 percent of their annual output in the second half.

Palm oil stockpiles in Malaysia shrank for a fifth month in May from April as exports gained. Inventory fell 3.7 percent to 1.56 million tons, the Malaysian Palm Oil Board said on June 10. Output rose 6.1 percent to 1.39 million tons while exports expanded 6 percent to 1.36 million tons.

Palm oil demand typically picks up in the third quarter with major festivities in China, India, Pakistan and Indonesia, the most populous Asian countries.