palm oil should fall to RM2,600 by June 2011 on higher output in

Southeast Asia and a decent soya crop but the pace of decline will be

slower than the market expects, thanks to unusually low stocks, a key

analyst said last Friday.

The forecast by LMC chairman James

Fry represents a fall of 20.6 per cent from current palm oil futures,

which closed at RM3,276 a tonne on Thursday, and takes into account

palm oil’s higher than usual premium over diesel.

“It is

hard to see why this gap should widen since biofuel demand can adjust

downwards. A normal crude palm oil to diesel gap of US$150 (RM471) by

June means RM2,600,” London-based Fry told an industry meeting in Kuala

Lumpur.

“Weak output and high exports imply low stocks till

mid-2011, pushing spot CPO above soya oil prices. After that, output

fears that heavy rains induced by La Nina will hurt output in top

producers Indonesia and Malaysia, outpacing US soya oil’s rise of 24 per

cent.

That means crude palm oil futures will have to remain

in backwardation, which will prompt overseas buyers to delay

purchases, Fry said.

Competing soya oil will increasingly

fill global vegetable oil demand, given a recent surge in palm prices

and the approach of the northern hemisphere winter, when the tropical

oil solidifies.

Soya oil will be attractive to buyers as South

American planting has not been so much affected despite the warnings

about the La Nina-driven drier weather potentially sapping yields, Fry

said.

“South American output is still uncertain, but a special

factor is the impact of Argentine politics,” he said, referring to the

world’s biggest exporter of soya oil and one of the top suppliers of

soya beans. “Farmers may delay bean sales in the hope of cuts in export

taxes.”

Although palm oil output and stocks will be tight

for the next few months, new areas, mainly in Indonesia, that are

coming into production due to a commodities boom in 2007 and 2008 will

add at least 3.5 million tonnes to total output, Fry said. – Reuters