Palm oil may extend a rally as dry weather in the main growing regions in Southeast Asia spurs speculation of lower output growth just as biodiesel demand expands, according to hedge fund manager Michael Coleman.
Futures may advance to 3,000 ringgit ($915) a metric ton within four months, said Coleman, who helps manage the $143 million Merchant Commodity Fund from Singapore. The forecast implies a 6.8 percent increase from yesterday’s close on the Bursa Malaysia Derivatives in Kuala Lumpur. Palm last traded above 3,000 ringgit in September 2012.
The world’s most-used edible oil is heading for the biggest monthly climb since October amid water shortages in some Malaysian states and dry weather in parts of Indonesia. The two countries account for about 86 percent of global production, according to the U.S. Department of Agriculture. While inadequate rain generally hurts palm oil supplies nine to 18 months later, prices move in advance, said Coleman, who started trading commodities at Cargill Inc. in 1982.
“It doesn’t matter that it takes 12 months for it to actually impact, so the price leads,” Coleman said in an interview in Singapore on Feb. 25. “The market has become more headline-driven. Outside speculators, they see dry weather and they know that palm trees don’t like dry weather.”
Most-active futures rallied to as much as 2,818 ringgit a ton yesterday, the highest level since September 2012, and settled at 2,810 ringgit. The price traded 1.3 percent lower at 2,774 ringgit by 4:51 p.m. in Kuala Lumpur today, trimming this month’s advance to 8.4 percent.
Investors are also increasing bets that an El Nino weather pattern will happen later this year, potentially cutting palm output, said Coleman. The event, which affects weather worldwide, can parch Indonesia and Malaysia.
Dry weather in Indonesia may limit the expected increase in palm production in the first half, Martua Sitorus, executive deputy chairman at Wilmar International Ltd., said on Feb. 21. The Singapore-based company is the largest palm oil processor.
In Indonesia’s Riau, the second-biggest province on Sumatra, a haze emergency is declared to March 12 on smoke from fires, Sutopo Purwo Nugroho, a spokesman at the disaster management agency, said in a text message today. Drought in Malaysia prompted water rationing in areas around the capital, with Khalid Ibrahim, chief minister of Selangor state, saying Feb. 24 that local raw-water supply is in critical condition.
“Generally February, March are dry months in many parts of Malaysia, this time it’s longer than normal,” International Trade and Industry Minister Mustapa Mohamed said in an interview with Bloomberg Television’s Haslinda Amin today. “If it goes beyond March, agriculture could be affected.”
Singapore, the island city-state that’s located between the two countries, is experiencing a record dry spell, according to the National Environment Agency. The dry weather, which has parched parks, may extend into the first half of March, the agency said Feb. 22.
While palm usage in biodiesel is beating expectations, there was disappointing demand in China and current economics for food usage is not favoring palm, according to Coleman. The market is telling people to use less palm oil for cooking, and that is acting as a restraint, he said.
The premium of soybean oil futures in Chicago over palm was at $58.267 a ton yesterday, according to data compiled by Bloomberg. That compares with an average of $202.53 over the past year. The oils are substitutes.
Indonesian output of palm oil will increase 8.8 percent to 31 million tons in 2013-2014, while Malaysia’s will decline 0.6 percent to 19.2 million tons, USDA data show. Global supply is forecast at 58.4 million tons from 55.8 million tons.
Sime Darby Bhd., the world’s biggest listed palm oil producer, advanced 1.6 percent in Kuala Lumpur this month, the most since June. Golden Agri-Resources Ltd., the second-biggest grower, rose 7.7 percent in February, and was at 56 Singapore cents. That would be the largest monthly climb since October.