Analysts uncertain about palm oil price outlook

Three leading palm oil market analysts each offer a substantially different medium term outlook for the commodity. These differences are the result of uncertainties about biofuel subsidies in the US, demand in Asia, the development of other vegetable oil markets and the outlook for crude oil.

Vegetable oils are increasingly used in biofuels as crude oil prices have tripled to a record in five years. US farmers have planted more corn to meet demand for ethanol, pushing sowings of soybeans to a 12-year low. Malaysia and Indonesia account for about 90 percent of palm oil output, the most competitive vegetable oil. Palm oil on the Malaysian Derivatives Exchange, which trades the global benchmark, touched a record 2,764 ringgit on June 6 and has averaged 59 percent more since January than a year ago. The most active contract gained 1.4 percent to 2,606 ringgit on Friday. Soybean oil, palm oil's main competitor, reached a 23-year high of 40.49 cents on Tuesday.

Up on soaring demand
Dorab Mistry, a director at Godrej International, thinks palm oil futures in Malaysia may advance as much as 15 percent during the next year because of rising demand for biofuels and a shortfall in supplies of other vegetable oils. Prices might climb to up to 3,000 ringgit, or $870, a ton in the year ending Sept. 30, 2008, Mistry said during a conference in Goa. Earlier this year, he had predicted that prices would surpass 2,500 ringgit this year. Mistry has traded vegetable oils since 1976.

Demand for vegetable oils in the year to September 2008 may rise by 5 million tons, while supply may increase by 3.9 million tons, Mistry thinks. This incremental demand includes two million tons for biofuels and three million for food purposes.

Down, on US subsidy cut
For his part, James Fry, managing director of London-based LMC International and a leading gobal palm oil market analyst, told reporters at a conference in India that palm oil prices could ease from January if the United States cuts incentives it gives to biofuel producers.

Fry thinks palm oil prices are likely to reach 2,000 to 2,100 ringgit per tonne by March, down from the current levels of around 2,600 ringgit per tonne. The U.S. may cut subsidies to its biofuel units and if it does that by January global palmoil prices will start softening

The subsidy the US government gives is meant to encourage local soybean oil being converted into biofuel. But many people are importing palm diesel instead of using local soyoil to make biofuels. They import palm diesel, mix it with 1 percent local diesel, make the blend, that is biofuel, and collect the subsidy. Analysts have been expecting the US to stop this misuse of the subsidy for the last six months:
energy :: sustainability :: ethanol :: biodiesel :: biomass :: bioenergy :: biofuels :: palm oil :: crude oil ::

Steady growth, stable prices
Finally, according to Thomas Mielke, chief editor of Oil World, a trade publication, global palm oil production may rise to a record 41 million tons in the year to September 2008, from a probable 37.38 million tons this year, as crops recover from the dry season in Malaysia and Indonesia. He said he expected prices to trade between 2,300 and 2,600 ringgit in the next 12 months.

Mielke thinks palm oil can partly fill the gap created by insufficient production growth in soybeans, canola and sunflower.

References:
International Herald Tribune: Price of palm oil predicted to leap - September 24, 2007.

Reuters: Palm prices seen falling if U.S. cuts biofuel subsidy - September 23, 2007.