Palm Reserves Rising Most Since 1999 After Oil Rout: Commodities

Palm oil inventories are rising the most since 1999 as demand expands at the slowest pace in more than a decade, extending the year-long bear market.

Stockpiles of the most-used cooking oil are poised to jump 21 percent to a record 9.5 million metric tons in 2013-2014, U.S. Department of Agriculture data show. Demand will advance 4.4 percent, the least in 12 years. Futures will drop 8.8 percent to 2,200 ringgit ($685) a ton by the end of December, a level last seen in 2009, according to the median of 13 trader, analyst and producer estimates compiled by Bloomberg.

The oil used in everything from candy bars to biofuels entered a bear market in June 2012 after prices that peaked at 4,486 ringgit in 2008 spurred farmers to expand output. The glut is being compounded by surging supplies of competing soybean oil, with U.S. growers poised to reap their biggest-ever crop when the harvest starts in September. Cheaper palm cuts costs for Nestle SA (NESN) and other foodmakers while crimping profit for producers including Felda Global Ventures Holdings Bhd. (FGV)

“You’ve got a lot of supply coming into the market,” said Chris de Lavigne, a global vice president at Frost & Sullivan in Singapore who advises the palm industry and has tracked edible oils since 2006. “I’m particularly worried about the September period,” he said, predicting that palm oil prices will drop as low as 1,800 ringgit by the end of the year.

Soybean Oil

While prices are rallying now, they fell 20 percent to 2,412 ringgit on the Bursa Malaysia Derivatives in the past year as the Chicago Board of Trade’s soybean oil futures declined 12 percent to 45.95 cents a pound ($1,013 a ton). The MSCI All-Country World Index of equities advanced 16 percent and a Bank of America Corp. index shows Treasuries lost 2.3 percent.

Palm production, accounting for 35 percent of cooking oil supply, will expand 5 percent to 58.1 million tons in 2013-2014, USDA data show. Output doubled over the previous decade, led by Indonesia and Malaysia. The predicted stockpiles are equal to 17 percent of demand, the highest level since 1989, data compiled by Bloomberg show.

Supplies of soybean oil, the second most-consumed edible oil, will rise to a record for a fifth year and reach 44.6 million tons, the USDA predicts. It will average 43.50 cents in the third quarter, Societe Generale SA estimates.

Palm rallied about 10 percent in six weeks, reaching a three-month high of 2,491 ringgit on June 20, as buyers accelerated purchases before the start of the Muslim holy month of Ramadan in July. Stockpiles in Malaysia, the biggest producer after Indonesia, fell for a fifth month in May, while remaining 1.7 percent higher than a year earlier, industry data show.

Listed Producer

Prices may advance to 2,600 ringgit in the next three months, Mohd Bakke Salleh, chief executive officer of Sime Darby Bhd. (SIME), told reporters in Kuala Lumpur on May 31. The company, based in the city, is the biggest listed producer.

The wider discount to soybean oil may boost demand from buyers that can switch between the products. Palm averaged $317.09 a ton less since the start of the year, compared with $201 in 2012, according to data compiled by Bloomberg.

Consumption may exceed the USDA’s forecast because of rising demand from fuel producers. Brent crude oil averaged $108 a barrel since the start of January, 17 percent above the five-year average and increasing the attractiveness of biodiesel, which can be made with edible oils. Global output of the alternative fuel will rise 4.9 percent to 429,000 barrels a day in 2013, the International Energy Agency estimates.

Industrial Users

Demand is threatened by slowing economies in some consuming nations. While India will grow 5.1 percent this year, unchanged from 2012, Indonesia’s expansion is set to drop to 6.1 percent from 6.2 percent, according to economist estimates compiled by Bloomberg. The World Bank cut its forecast for China to 7.7 percent from 8.4 percent this month.

While palm is produced year-round, supply typically accelerates in the second half because of growing cycles. Production in Malaysia increased in the third quarter each time since 1989 and stockpiles expanded in all but one year, data compiled by Bloomberg show.

The extra supply will come just as farmers in the U.S., the largest soybean grower, start their harvest. They will reap 12 percent more, contributing to a 6.6 percent gain in global output, according to the USDA. Inventories will jump 20 percent to 73.7 million tons.

Instant Noodles

Record palm production is helping manufacturers because it is used in everything from Nestle’s Maggi instant noodles to Unilever’s soaps. Global food prices tracked by the United Nations’ Food & Agriculture Organization are 9.5 percent below the record reached in February 2011. The Rome-based group’s oils and fat index dropped 15 percent in the past year.

Felda, which completed the world’s third-largest initial public offering in 2012, will report an 11 percent drop in profit to 716.8 million ringgit this year, according to the mean of 19 analyst estimates compiled by Bloomberg. Shares of the company fell 1.1 percent to 4.57 ringgit this year and will decline to 4.09 ringgit in 12 months, according to the average of 17 analyst estimates compiled by Bloomberg.

Dorab Mistry, a director at Godrej International Ltd., is bearish on prices after July. Mistry is known in the industry as Mr. Titanic after he correctly compared vegetable oil prices to the ill-fated liner in 1998.

“We will be closer to 2,000 ringgit at the end of the year, unless we have a climatic problem somewhere,” said Mistry, who has traded palm for about three decades. “You have a huge amount of soft oils coming to the market.”

To contact the reporters on this story: Luzi Ann Javier in Singapore at ljavier@bloomberg.net; Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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