Palm oil may extend an advance from the highest level since 2012 if an El Nino parches crops in Southeast Asia this year, according to Dorab Mistry, director at Godrej International Ltd.
Prices may approach 3,500 ringgit ($1,070) a metric ton should the event hurt production from late 2014, said Mistry, who’s traded vegetable oils for more than three decades. Futures would “cling” to 3,000 ringgit beyond June under that scenario, he said. If rains come as normal and the high production cycle starts from July, prices will trade from 2,600 ringgit to 2,900 ringgit from July to October, he said.
The prediction coincides with a rally in everything from corn to coffee and sugar as dry weather threatens crops in Brazil, potentially stoking global food inflation. The surge in palm futures would weaken demand for the oil in biodiesel, said Mistry, who in November correctly forecast that futures would trade from 2,600 ringgit to 2,900 ringgit through March.
“Production is under-performing and stocks are tight,” Mistry said in remarks prepared for the Palm and Lauric Oils Conference in Kuala Lumpur today. “In the event that an El Nino develops, I believe CPO futures will cling to 3,000 ringgit beyond June. Production is likely to be affected from late 2014 onwards and we may be staring 3,500 ringgit. We shall kill all discretionary biodiesel demand.”
Dry weather in Malaysia and parts of Indonesia is already threatening to curb supply of palm oil just as demand in biodiesel increases. Michael Coleman, who helps manage the $143 million Merchant Commodity Fund in Singapore, said on Feb. 25 that prices may advance to 3,000 ringgit within four months as traders anticipate the impact of dry weather on production.
El Nino can shrivel crops in Indonesia and Malaysia, which account for about 86 percent of global production. While inadequate rain generally hurts palm supplies nine to 18 months later, prices move in advance, according to Coleman.
The event, which affects weather worldwide and can roil agricultural markets as farmers contend with drought or too much rain, may occur in the coming months, Australia’s Bureau of Meteorology, said on Feb. 25. There’s a 75 percent chance an El Nino will occur in late 2014, according to researchers Josef Ludescher and Armin Bunde, who published their prediction in the journal PNAS last month.
Palm oil, used in everything from food to biofuels, surged to 2,868 ringgit in Kuala Lumpur today, the highest level since September 2012. Futures rallied 33 percent from more than a three-year low of 2,137 ringgit in July and ended at 2,834 ringgit.
A low-production cycle that started in February 2013 turned out to be more severe than anticipated and may only end in May, with a new high-output cycle beginning in June, said Mistry. If the dry spell ends next week and rainfall is normal for the rest of the year, Malaysia may produce 19.5 million to 19.7 million tons of crude palm oil in 2014, he said, reiterating a November forecast. Output was a record 19.2 million tons last year, data from the palm oil board show.
Indonesian output will expand by 3 million tons to 30.5 million tons in 2014 from 27.5 million tons last year, with most of the growth coming in the last quarter, Mistry said.
“I must caution you this may turn out to be an optimistic figure if the current dry weather does not end very soon,” said Mistry. “If this dry spell prolongs or a new El Nino develops later this year, all forecasts of CPO production and price will have to be revised.”
Indonesia’s biodiesel mandate is a “game changer” and will keep palm prices relatively high for a long time, said Mistry. Biodiesel capacity will need to be expanded, requiring producers to lock in prices at least one year in advance, limiting the availability of freely tradeable oil and needing much larger stocks to be maintained, he said.
While the mandate in Indonesia can absorb 3.1 million tons of palm, the country may consume only 1 million tons of extra oil in 2013-2014, said Mistry. About 2.4 million tons will be used this year, less than the target of 3.4 million tons, according to Fadhil Hasan, executive director of the Indonesian Palm Oil Association. Southeast Asia’s biggest economy increased the blending rate to reduce import costs and narrow the current-account deficit.
Global cooking oil demand will probably increase by about 6.5 million tons in the 12 months from October 2013, while supplies are set to expand 6.8 million tons, said Mistry.
“Until July, world vegetable oil stocks and particularly palm oil stocks will remain very tight,” he said.
Soybean oil futures will gradually climb to 47 cents a pound in Chicago, Mistry predicted. Sunflower oil may trade at a premium of between $30 to $100 a ton over soybean oil until August, he said.