The crude palm oil (CPO) price continues to rise supported by the impact of the El Nino weather phenomenon. El Nino causes a dry spell in Southeast Asia, home to the world's largest palm oil plantations. As a result, CPO inventories in Malaysia may have declined to 2.11 million tons, an 11-month low in February 2016. Meanwhile, Singapore-based agribusiness trader Olam International Ltd said CPO stocks will decline to the range of 1.5 - 2.0 million tons in the second quarter of 2016. Obstacles to higher CPO prices are Malaysia's strengthening ringgit (which curtails demand for Malaysian palm oil) and attractive prices of soybean oil.
Palm oil futures rose to 2,540 ringgit (approx. USD $621) per ton on Monday (07/03). Prices are expected to rise further as palm oil inventories may shrink further due to the impact of the El Nino weather phenomenon (although El Nino is estimated to end in the second quarter of the year its impact will be felt way beyond this quarter). As such, CPO futures may be able to rise up to 2,700 ringgit (approx. USD $660) per ton by late March.
Indonesia and Malaysia are the world's largest CPO producers and exporters. Together they account for nearly 90 percent of global CPO output. However, both countries have been affected by the most severe El Nino in nearly two decades. Apart from reduced output, Indonesia may also export less CPO due to the country's biodiesel program. Indonesia could blend an average of between 140,000 tons and 150,000 tons of biodiesel per month in 2016. This should also support international prices. Lastly, recently rising crude oil prices (slowly rising toward the USD $40 per barrel level) should also manage to boost demand for palm oil.
Further Reading: Analysis of Indonesia's Palm Oil Industry
But there is also a risk that higher prices of CPO will increase the attractiveness of soybean oil at the expense of palm oil demand. Soybean oil prices are currently being traded at the lowest level since 7 January 2016. Soybean oil and palm oil dominate the global edible oil market accounting for about 60 percent of the world’s total production. Both commodities can substitute each other and therefor food processors can alternate between these commodities depending on favorable prices.
Indonesian Palm Oil Production and Export Statistics:
(in USD billion)
¹ indicates forecast
Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture