Crude palm oil (CPO) production in Indonesia and Malaysia is expected to decline due to the impact of the El Nino weather phenomenon (that brought a prolonged dry season to Southeast Asia). CPO production in Malaysia could fall between 1.5 and 2 million tons this year according to Dorab Mistry, Director at Godrej International. Declining output in the world's two leading palm oil producers and exporters implies that palm oil prices should be able to rise further. At the start of this week palm oil futures traded in Kuala Lumpur (June delivery) rose to 2,779 ringgit (approx. USD $695) per ton, the highest level since March 2014.
Together, Indonesia and Malaysia produce about 86 percent of the total palm oil supply worldwide. Palm oil is an edible oil used in various sectors such as cosmetics, food and biodiesel. With these two nations having been plagued by the El Nino weather cycle (the strongest one in nearly two decades), palm oil output is estimated to drop considerably this year. Malaysia may only produce 19 million tons this year, while Indonesia's output is estimated at 31 million tons. As a side-effect of curtailed production, palm oil prices are currently touching their highest levels in two years. Leading analyst Mistry believes that palm oil futures can rise further to 3,000 ringgit (approx. USD $751) before the year-end.
Another factor that supports higher palm oil prices is Indonesia's biodiesel program. According to Mistry this program is "going well", producing about 200,000 tons of palm oil-derived biodiesel each month. This implies that palm oil demand is relatively strong (due to higher demand from Indonesia, while demand from key export markets such as India and China remains sluggish) and also gives rise to estimates that Indonesia's palm oil export has plunged to about 1.95 million tons in February. The latest data from the Indonesian Palm Oil Producers Association (Gapki) show that Indonesia exported 2.1 million tons of crude palm oil in January 2016, down 16 percent from the export volume one month earlier.
Expectation of lower soy bean output in the USA also encourages higher palm oil prices. Soybean oil and palm oil dominate the global edible oil market accounting for about 60 percent of the world’s total edible oils production. As both commodities can substitute each other, food processors tend to switch between both commodities depending on prices. A big soy bean harvest causes the soy bean price to fall and therefore food processors would prefer to purchase soy bean oil, implying weakening demand for palm oil and weakening palm oil prices. In the current context, however, palm oil faces few competition from soy bean oil.
In line with expectations, Indonesia's Trade Ministry announced at the start of the week that the nation keeps its export tax for crude palm oil at zero percent in April.
Indonesian Palm Oil Production and Export Statistics:
(in USD billion)
¹ indicates forecast
Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture