singapore—The benchmark palm oil contract on the Bursa Malaysia closed at a record high of MR 4,524/mt at the mid-day close May 12.
Palm oil prices soared on gains in the soybean complex, which in turn were lifted by optimism ahead of the World Agricultural Supply and Demand Estimates report due for release later May 12 by the US Department of Agriculture, as well as technical buying and strong fund activity."Funds have also been buying up commodities as a hedge against inflation considering the low USD," a source said.
Other than production concerns, the rise in palm oil prices has been attributed to the strong vegetable oil complex. "The rise today is mainly due to competing oils, whether on the Dalian or the CBOT. Palm oil supply tightness is a known fact, and there were no bullish fundamentals in the palm market to justify the high today," a trader said.
Vegetable oil complex ralliesUS soybean prices were being supported by low production amid high demand from China, while soybean oil prices were supported by biodiesel demand, as well as its allure as the cheapest softoil, allowing room for palm oil prices to rise.
"Palm oil is cheaper than soybean oil by $300/mt for the next six months, for July to September and October through December. In India and China, there was also a shift to soybean oil as sunflower oil prices have remained at astronomical levels due to lower yields and the fear of export quotas," said a source, who added that canola oil prices are also at record highs while soybean oil prices are still below the 2008 high of $1,535/mt.
"The shortage of soybean oil in the US resulted in higher soybean oil imports from Argentina, which has seen the basis trend higher, as well as higher canola oil imports from Canada," said the source, who expected canola oil supply to remain tight until the harvest in October, noting the $200-$250/mt spread between July and November shipments.
"Global oilseed production was pressured significantly by weather concerns last year and this has resulted in a supply crunch, which saw prices continue to trend upwards. The labor shortage in palm oil-producing regions is also worrying," the source said.
Labor issues weighLabor shortages in Malaysia are expected to impact production and reduce estimates for the year. "First we expected Malaysian production in 2021 would be around 19.6 million, but production did not return as expected and I have lowered my estimate to around 18.9 million," a source said. Two other producers said production could be flat on year at 19 million. "Production will be impacted due to continued labor shortages and this problem will not be solved until the borders open," a Malaysian producer said.
However, another producer said the labor issues were not as pronounced in Sabah and Sarawak. "Labor from other tasks can be rotated into harvesting, and it is not that we have a bumper crop that makes it impossible. I feel there is enough manpower in the system, at least in Sabah and Sarawak," this source said. "We have seen a good crop this month and I acknowledge that harvesting could be delayed by around a week, but this is not likely to affect the quality of the fruit significantly," the source added, dismissing concerns that laborers would not return after the Hari Raya holidays.
Rajesh Modi from Singapore-based brokerage of Sprint Exim said that in addition to production issues and funds switching from technology to commodities, demand would also be supported by low destination stocks.
Another broker said Chinese demand would likely support the market in the near term. "There will likely be a demand pull from China as they remain undercovered on the forwards," the source said, adding the pandemic situation in India posed a threat to the upside. "Other than the demand destruction caused by the dire COVID-19 situation, there have also been a much higher number of washouts in the market."
Market sources estimated that 20,000-25,00 mt of crude palm oil had been washed out by Indian buyers in the last three days, and were divided on the direction palm oil prices will take.
"I think monthly end stocks will remain at under 2 million mt for the rest of the year. Last year, peak production was in June at 1.9 million mt and this year is not looking as promising despite the earlier sentiment about a production recovery in the second half of the year. However, the market could be evenly poised as there will definitely be COVID-19 related demand destruction," a source said.
"The BMD FCPO contract has surpassed the previous high of MR 4,486 in March 2008. Now FCPO is in new territory and the move is unpredictable, but I expect the USDA report tonight to lead in the near term," said Chandran Sinnasamy of CGS-CIMB Futures.
At the mid-day close May 12, S&P Global Platts assessed CPO CFR West Coast India up $20/mt day on day at $1,255/mt for June dates and CPO FOB Indonesia up $17.50/mt at $1,222.50/mt.
