Dry weather, biofuel mandate to boost palm prices in 2014
Palm oil futures are set to climb for a second year, driven by crop damaging dry weather and Indonesia's higher biodiesel mandate, although bumper global oilseed supplies and weak demand from key consumers could cap gains.
The next three weeks are crucial for the outlook on palm oil output, traders and analysts at a three-day industry conference in Kuala Lumpur said. If dryness continues to plague oil palm plantations in top producers Indonesia and Malaysia, it would reduce yields of fresh fruit bunches.
Benchmark Malaysian palm oil prices hit a 17-month top of 2,868 ringgit ($880) per tonne on Wednesday, extending gains of almost 10 percent in February - the biggest monthly rise since October 2013.
"In the event that an El Nino develops, I believe crude palm oil futures will cling to 3,000 ringgit beyond June," leading vegetable oil analyst Dorab Mistry said at the conference.
The El Nino weather pattern usually results in below-average rainfall in the main palm oil producers, cutting yields and pushing up global prices.
"Production is likely to be affected from late 2014 onwards and we may be staring at 3,500 ringgit," said Mistry, who heads the vegetable oil trading arm at India's Godrej Industries . Palm prices last exceeded this level in April 2012.
But at such high prices, demand could shift to rival edible oils of which there is ample supply, traders and analysts said.
"If palm oil gets too 'greedy', we will see more importers switching to sun, soy and canola oils," James Fry said, capping prices at 3,000 ringgit by the middle of 2014.
High Prices to Hit Demand
Overseas purchases of palm oil by India, the world's top importer of vegetable oils, are set to drop 6 percent in the year to October 2014, with buyers opting for rival soybean oil as the price spread between the two narrows, traders said.
Palm oil usually trades at a discount of $100 to $150 a tonne to soybean oil, but last month's rally in Malaysian futures has tightened the spread.
Palm oil imports by China, the world's No.2 edible oil buyer, could also take a hit in the coming months as stockpiles at its major ports have risen to near record highs of around 1.2 million tonnes.
While Mistry expects Indonesia's biodiesel mandate to be a "game changer" that will keep palm oil prices relatively high for a long time, Fadhil Hassan - executive director of the Indonesian Palm Oil Association - said the rally in palm prices may curb the country's use of the tropical oil for blending.
Jakarta's energy ministry has raised the minimum bio content in diesel to 10 percent, up from levels of 3-10 percent. For the power industry, the minimum has been doubled to 20 percent.
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