Palm Oil Surges as Tighter Soybean Supplies May Increase Demand

Palm oil rallied to the highest level in more than six weeks on concern that hot, dry weather in South America may damage crops of soybeans, crushed to make an alternative edible oil, and as demand may rise in China.

The March-delivery contract advanced 1.6 percent to close at 3,225 ringgit ($1,026) per metric ton on the Malaysia Derivatives Exchange, the highest price at close since Nov. 18. Futures gained 5.2 percent in December, rising for a third month and paring the year’s decline to 16 percent.

A much drier and sometimes much hotter weather pattern may continue for the next 10 days in Argentina, Telvent DTN Inc. said Dec. 30. Argentina is the largest shipper of animal feed and cooking oil made from soybeans. Palm oil and soybean oil are substitutes in food and fuel uses.

There has been “a lot of concern on the South American weather conditions over the last one week and that has caused soybean prices to move up,” Ivy Ng, an analyst at CIMB Group Holdings Bhd., said by phone from Kuala Lumpur. “The key determinant will be the weather, with the demand being supported in the near-term by the upcoming festive season.”

Lunar New Year celebrations in China from Jan. 23 will maintain demand from the biggest vegetable oil consumer until the third week of this month, said Ng. The weeklong festival usually spurs restaurants to stock up on cooking oil.

Increased Risk

“In South America, the severe dryness in many important soybean and corn-growing areas like Argentina, Uruguay and Paraguay has significantly increased the risk that the current crop estimates will not be reached,” Hoe Lee Leng, an analyst at RHB Capital Bhd., wrote in a report today. “Any crop losses in South America would raise demand for U.S. soybeans in 2012.”

Soybean futures gained 6.8 percent last month on the Chicago Board of Trade as the adverse weather threatened to reduce yields in South America, increasing demand for U.S. supplies. Soybean oil in the same month advanced 5.9 percent.

Malaysia’s palm oil exports fell 3.3 percent to 1.49 million tons in December from the previous month, Societe Generale de Surveillance, an independent cargo surveyor, estimated today. Shipments dropped 2.6 percent to 1.49 million tons, Intertek said Dec. 31.

To contact the reporter on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net

To contact the editor responsible for this story: Richard Dobson at rdobson4@bloomberg.net

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