Problem of plenty for crude palm oil

Robust output likely from top producers, Malaysia and Indonesia

The Crude Palm Oil (CPO) futures contract traded on the Multi Commodity Exchange (MCX) has registered a fall of as much as 18 per cent so far in 2017, diving to a low of ₹451.5 per 10 kg in early August from its January high of ₹582.

The fall in price is mainly attributable to the significant rebound in global vegetable oil production and rupee appreciation against the dollar.

However, in the last few days, prices have risen again, surging to ₹508 per 10 kg, on the back of increase in import duty on CPO.

Last week, the Centre raised import duty on crude palm oil to 15 per cent from 7.5 per cent and on refined oil to 25 per cent from 15 per cent, to support domestic farmers and refiners.

The import duties on other crude edible oils like soya and sunflower have also been increased to 17.5 per cent from 12.5 per cent.

However, the bearish trend is expected to continue for the short term, given the expectations of robust output from Malaysia and Indonesia, the world’s largest producers of palm oil.

The Malaysian CPO futures contract traded on the Bursa Malaysia Derivatives Exchange dropped about 19 per cent from MYR 3,163 (Malaysian ringgit) per tonne in January to MYR 2,574 in early August. However, Malaysian palm oil futures have increased mildly in the last few sessions, tracking stronger demand for edible oils.

CPO prices have witnessed huge volatility over the last three years. During mid-2015, CPO prices touched a multi-year low of about MYR 1,800 a tonne on expectations of higher output, weakness in soyabean/rapeseed oil prices and an overall drop in demand for edible oil from China.

Prices, however, then rebounded in a few months as El Nino hit the output from Malaysia. Prices hit a high of MYR 3,150 a tonne towards the end of 2016.

Pick-up in yield

The production of palm has recovered from the adverse effects of El Nino. Latest statistics from the Malaysian Palm Oil Board (MPOC) show that CPO production for January-June 2017 amounted to 8.72 million tonnes in Malaysia, up 15 per cent, from 7.6 million tonnes in the same period last year.

Vinod TP, Senior Research Analyst from Geofin Comtrade, says, “Post El Nino effect, there is a strong pick-up in yield, especially in Malaysia, which rose from 3.93 MT per hectare to 4.04 in 2017.”

A similar trend is prevailing in Indonesia as well. And since higher production is pressing prices down, demand has also improved, he added.

True to this, data from MPOC shows that during the January-June 2017 period, export of palm oil from Malaysia was up 7.2 per cent year-on-year.

All major consuming countries, namely, China (+13 per cent), Pakistan (+19 per cent) and Iran (+113 per cent) showed improved demand, except India (-22 per cent). A rebound in India’s oilseeds harvest has helped raise domestic vegetable oil production.

Meanwhile, according to USDA update, Indonesian palm oil production is estimated at 36.5 million tonnes (mt) in 2017-18, up from 34 mt in 2016-17. During January-May 2017, Indonesian palm oil product exports were 29 per cent higher than the corresponding period in 2016.

Higher output

Rising production is expected to weigh on crude palm oil (CPO) prices, going ahead. Meanwhile, production in soyabean, a key substitute to palm oil, is projected to grow higher, given strong yields in key producing countries, sending a bearish signal to CPO prices.

Strengthening of the ringgit against the US dollar is also expected to apply downward pressure.

On the domestic side, with the increase in import duty, though there is a possibility of lower imports coming in, the strengthening of the rupee against the US dollar will reduce the prices to an extent.

Malaysia and Indonesia account for almost 80 per cent of global production of palm oil. India, the European Union, China and Pakistan are the major importers of the commodity.

Change in the demand-supply dynamics in CPO in these countries will impact the price of the commodity.

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