Possible To See Palm Oil At A Premium Over Soyoil?

Posted on Dow Jones.

• KUALA LUMPUR (Dow Jones)--The price of soyoil continues to fall, raising the specter of a rare market reversal in which palm olein could sell at a premium to rival soy.
  
  Soyoil's premium over palm olien - more than $200/ton only a few months ago - has slumped to around $35/ton. Analysts now forecast that for the first time in many years soyoil's price could tumble below palm.
  
  "It is possible to see palm oil at a premium over soyoil, but my guess is that this will be brief," said James Fry, Chairman, LMC International, a London-based commodities consultancy.
  
  This is because countries other than India will switch from buying palm oil to soy oil in order to take advantage of its falling price, Fry said.
  
  "It is a phenomenon (reversal of premium) which happens once every few years and is a reflection of the cash market. It is the right time to buy soybean oil and sell palm oil," said a London-based trading executive who didn't want to be named.
  
  The palm-soy price reversal, he said, could occur in the next month or so.
  
  Signs of growing demand for soybean oil include the fact that China has purchased at least 90,000 metric tons of soyoil since Friday; prices were between $685 and $690 a ton, on a cost and freight basis. China's looking for even more cargoes, a senior Jakarta-based trading executive said.
  
  The global economic recession is making buyers, including those in China, especially price-conscious, says Alvin Tai, commodities analyst with OSK Research, a Kuala Lumpur-based brokerage.
  
  Ironically, the weak world economy may also slow overall demand for all varieties of vegetable oils, he notes.
  
  India, the world's No. 2 vegetable oil consumer after China, is proving instrumental in the shifting soy-palm oil dynamic.
  
  Until about two years ago, India imposed a lower import duty on soyoil, 45%, compared with crude palm oil at 80%; this served to boost imports of soyoil. However, in early 2008, India removed import duties on all crude edible oils in order to fight inflation; later in the year, it levied a 20% import duty on soyoil to help domestic farmers during the local soybean harvest. There's still no tariff on crude palm oil.
  
  "We are now seeing the tug-of-war between India and the rest of the world in their vegetable oil imports being played out again, with palm oil being favored by Indian tariffs, rather than soyoil," said Fry.
  
  Slowdown In Palm Oil Production
  
  The narrowing of the soy-palm oil premium mainly reflects the fact that palm oil production growth has been slowing, said Siegfried Falk, co-editor, Oil World, a Hamburg-based journal on oils and fats.
  
  Falk said global production of palm oil increased by a record 4.8 million tons in the marketing year to September 2008 - but during 2008-09 it may increase by only 2.3 million tons. This is because cyclical biological stress in oil palm trees is expected to reduce yields, and in Indonesia the economic slowdown will likely discourage farmers from increasing their acreages.
  
  Malaysia's palm oil stocks fell to a nine-month low of 1.83 million tons in January; a further drawdown is expected this month because heavy rains slowed the harvesting of oil palm fruits.
  
  Analysts point out that palm oil's broad fundamentals have become tighter as South America's soybean harvest approaches. Recent rains have helped revive the fortunes of the Argentina's soybean crop, with last weekend's downpours providing a boost for growers, said Mike Tannura, a Chicago-based agricultural meteorologist.
  
  Tannura forecasts dry weather this week but doesn't expect heat stress and says maturation should begin during the next one to two weeks.
  
  Analysts said another factor which has contributed to soyoil's shrinking premium is its reduced use in making biodiesel.
  
  Until last year, Argentina was exporting large volumes of soyoil-based biodiesel, but changes in U.S. and European tax structures made this less attractive.
  
  Oil World's Falk cautions that soyoil could shortly regain its premium over palm olein. "Soya oil supplies will also be relatively tight this season," he said, adding that Oil World is likely to issue revised estimates for the demand and supply scenario on Friday.
  
  The latest rains in Argentina were helpful but won't fully offset the impact of recent drought conditions. Additionally, the shift in demand from palm oil to soyoil is expected to tighten supplies later this year.
  
  So far, palm oil prices have been generally quite strong, unlike other commodities such as soybeans and corn, because this is a lean-production season for CPO, noted OSK Research's Tai.
  
  He said palm oil prices can't hold on indefinitely on their own. Last week, CPO prices rose to a 40-day high, above MYR2,000/ton and are now hovering around MYR1,900.
  
  "The real test for prices will be in March, when palm oil production starts to rise," Tai said.