The crude palm oil (CPO) price touched its highest level so far this year. On Tuesday (20/09) palm oil futures (December delivery) - traded on the Kuala Lumpur exchange - ended the day at 2,690 ringgit (approx. USD $651 per metric ton). Palm oil prices are rising as CPO production in Indonesia and Malaysia will remain subdued this year due to droughts that were brought by the El Nino weather phenomenon earlier in 2016, while there is expectation of a rather wet season later this year due to the La Nina weather phenomenon.
Malaysian Plantation Industries and Commodities Minister Datuk Seri Mah Siew Keong said crude palm oil (CPO) production in Malaysia is expected to drop 10 percent (y/y) in 2016. In full-year 2015 Malaysia, the world's second-largest CPO producer after Indonesia, produced a total of 19.96 million tons. If indeed the nation's output will decline by 10 percent, it would mean that Malaysia produces 17.96 million tons in 2016, the lowest figure since 2010.
In the first half of 2016 Malaysia's CPO production tumbled 16 percent as the El Nino phenomenon prevented the palm oil trees from getting a sufficient amount of water. However, in the second half weather conditions are expected to improve despite some concerns that La Nina will bring an overdose of rain.
Meanwhile, global demand for Malaysian CPO increased (especially from China and India) hence putting more pressure on CPO stockpiles and pushing prices higher. According to the latest data from the Malaysian Palm Oil Council (MPOC), Malaysian CPO exports surged to 1.81 million tons in August 2016, the highest level over the past five years. CPO demand from China surged due to the nation's Mid-Autumn Festival that was held on 15 September. Meanwhile, demand from India will surely rise ahead of the Diwali Festival that is scheduled for 30 October.
Malaysian Plantation Industries and Commodities Minister Datuk Seri Mah Siew Keong said the average CPO price has risen to around 2,550 ringgit per ton so far this year, up around 14 percent (y/y) from last year's average CPO price. Meanwhile, the weakening ringgit makes Malaysian palm oil relatively cheap for those that hold foreign currencies, and therefore forms another reason why foreign demand for Malaysian palm oil has been rising.
Malaysia will implement its B10 biodiesel program in the fourth quarter of 2016. Earlier this year the implementation of this program, which requires a minimum bio content of 10 percent in biodiesel for the transportation sector, was delayed twice. Mah Siew Keong said when Malaysia's B10 program is fully implemented it will require 750,000 tons of CPO per year. Given that Malaysia's domestic CPO demand is set to rise on the back of this program, palm oil prices could get additional momentum to rise further.
Malaysian authorities are set to raise the palm oil export tax to 6.5 percent in October 2016, from 5 percent in the preceding month (Indonesia's export tax for palm oil shipments remains at zero).