Despite expectations of rising demand ahead of - and amid - the Ramadan and Idul Fitri celebrations, the price of crude palm oil (CPO) is expected to decline up to the end of June 2017. At the end of the trading day on Tuesday (30/05) the CPO price had fallen 0.56 percent to 2,502 ringgit (approx. USD $584.46) per ton (August 2017 contract) on the Malaysia bourse. So far this year, the CPO price has tumbled 14.48 percent.
The crude palm oil (CPO) price decline over the past couple of days is primarily caused by the strengthening Malaysian ringgit and the falling crude oil price after market players were disappointed about the decisions that were taken at the latest meeting of the Organization of the Petroleum Exporting Countries (OPEC) where the existing oil cut agreement was extended into March 2018, while market participants had hoped for deeper production cuts (in an effort to boost crude prices).
Meanwhile, the ringgit has mainly been appreciating due to US dollar weakness caused by the arrival of more controversial news surrounding US President Donald Trump's actions, while US economic data remain bleak, implying the Federal Reserve will be very careful not to raise interest rates too soon.
Another factor that will put downward pressure on CPO prices is expectation of rising soybean production in the United States where more land is made available for soybean crops.
Rising demand for CPO amid Ramadan and Idul Fitri celebrations is not expected to be enough to push the CPO price higher. Therefore, the price may stay within the 2,400 - 2,700 ringgit per ton range until late June 2017.
Moreover, CPO production in the world's two biggest producers (Indonesia and Malaysia) is expected to rise in the second half of 2017, hence giving the CPO price less room for growth. Regarding full-year 2017, Indonesia's CPO production is expected to rise nearly 13 percent (y/y) to 35.5 million tons, while in Malaysia CPO production is expected to rise 10 percent to 19.5 million tons.
Meanwhile, one week ago Indonesian President Joko Widodo approved a two-year extension to a moratorium on issuing new licenses to use land designated as primary forest and peat-land. This moratorium forms an effort to preserve the nature while reducing emissions from fires caused by deforestation. This moratorium somewhat limits Indonesia's CPO output and also limits room for growth of palm oil plantation firms' future corporate earnings.
Indonesia's CPO export rose 23.5 percent (y/y) to 8.02 million tons in the first quarter of 2017. The Indonesian Palm Oil Producers Association (Gapki) expects exports to grow 8 percent (q/q) in Q2-2017 due to rising demand amid Islamic celebrations.
Indonesian Palm Oil Production and Export Statistics:
(in USD billion)
Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture