Palm’s discount to soybean oil, which reached the biggest in four years this month, is poised to widen as output in Malaysia climbs, boosting inventories in the second-largest grower. The tropical oil fell to the lowest level since October 2010.
“Stock levels would climb because it’s peak-production season,” said Hoe Lee Leng, an analyst at RHB Capital Bhd., who’s tracked the commodity for more than a decade. “The discount could widen a little bit more before it narrows” after output crests, she said, without giving a forecast.
Palm oil has lost 13 percent this year on prospects for rising output and slower demand, while soybeans surged 35 percent, touching a record, as drought in the U.S. scorched fields and cut yields. That divergence helped drive the gap between palm oil and the oil crushed from the beans to $319.94 a metric ton on Sept. 5, the most since 2008. High soybean prices may encourage farmers across South America to sow record crops.
The differential between palm and soybean oil will “stay at a high level probably until the time you start to be sure that you’re getting a good South American crop,” said James Fry, chairman of LMC International Ltd. “They’re planting relatively early in South America where they can, because they can see these wonderful prices.”
Palm oil, which competes with soybean oil for use in foods and biofuels, fell to 2,763 ringgit ($905) a ton on the Malaysia Derivatives Exchange today, the cheapest close since October 2010. Soybeans were at $16.275 a bushel on the Chicago Board of Trade, after peaking at $17.89 on Sept. 4.
Soybean oil was at 54.97 cents a pound ($1,212 a ton) in Chicago, 4.9 percent higher since the start of the year and 15 percent above the year’s intraday low on June 15. The gap between the two widened 4.9 percent to $307.92 a ton today, data tracked by Bloomberg. The record is $493.76 in August 2008.
Malaysian palm-oil stockpiles may reach a record, Godrej International Ltd.’s Dorab Mistry forecast on Sept. 6, without giving a timeframe. Inventories gained to 2.12 million tons last month, the highest level since October, according to data from the Malaysian Palm Oil Board, which shows holdings reached an all-time high of 2.27 million tons in November 2008. Output in the country typically peaks between July and October.
“Your production numbers are going to continue climbing,” said Hoe at RHB, who correctly predicted in April 2011 that palm oil would be weaker in the second half last year than the first. “After which, once you hit the peak, then it’s going to come off and you should see the discount narrowing.”
The gap between the two oils is set to contract as high soybean-oil prices will spur a switch to the tropical variety ahead of festival seasons in India and China, the biggest cooking-oil consumers, according to Standard Chartered Plc.
“The spread is going to narrow because palm just looks incredibly cheap,” said Abah Ofon, a Singapore-based analyst at the bank. “India and China are price-sensitive countries. Logic suggests that they will go for the cheaper oil.”
U.S. soybean inventories will be the lowest since 1973 by March, according to a forecast from INTL FCStone Inc. Both Goldman Sachs Group Inc. and Godrej’s Mistry have a three-month soybean price target of $20 a bushel.
Brazil, Argentina, Paraguay, Bolivia and Uruguay will boost soybean output 34 million tons to 148.5 million in 2012-2013, more than offsetting a fall of about 11.5 million tons to 71.7 million in the U.S., the Department of Agriculture said Sept. 12.