Talks to sell stakes in Felda Global Ventures Holdings (FGV) to two Indonesian billionaires have been suspended due to a management crisis at the world's third biggest palm plantation group, sources close to the deal said. (Reuters Photo/Samsul Said)

Short-Term Boost Seen for Palm Prices Before a Likely Reversal


NOVEMBER 26, 2016

Nusa Dua, Indonesia/Singapore. Lower output of palm oil and tight supplies of rival soybean oil are likely to give a short-term boost to the tropical product which hit four-year highs this week, before an expected reversal late next year as production recovers.

Higher mandates for biodiesel production in the United States and Indonesia will squeeze inventories of palm oil, used in candies to cosmetics and cooking oil.

"The view is that production should recover from El Nino back to 2015 numbers, but big gains could be more towards the second half of next year as there are still the lagging secondary El Nino effects," said Ivy Ng, regional head of plantations research at CIMB Investment Bank.

Benchmark palm oil has gained 21 percent this year, helped by a weaker ringgit and strong markets for rival edible oils. Palm hit a four-year high of 3,098 ringgit ($694.62) on Thursday (24/11).

The price could rise 10 percent from current levels by the first quarter of 2017, before declining again as stockpiles recover, leading industry analyst Dorab Mistry told a conference in Bali on Friday.

Analyst James Fry said palm would drop to around $500 per tonne, free on board, in the third quarter of next year, well below levels of around $685 this week .

Palm oil production in Indonesia and Malaysia, which account for 80 percent of global supply, is forecast to decline nearly 5 percent to 58.8 million tonnes in 2016 from a year ago, following dryness caused by El Nino, data from the US Department of Agriculture showed.

Indonesia's production of palm oil is expected to decline to 28.5-30 million tonnes this year, before climbing by up to 16 percent to 32-33 million tonnes next year, said Fadhil Hasan, executive director of the Indonesian Palm Oil Association.

Despite the projected higher output, it would remain "significantly below potential" because of lingering impacts of the El Nino in 2015, said analyst Siegfried Falk.

Biodiesel Demand

Indonesia, which started implementing a subsidy-based biodiesel program last year, is planning to increase production of the palm oil-based biofuel and is looking at expanding existing subsidies.

Indonesia is targeting demand for crude palm oil for use in biodiesel to grow to 10.6 million tonnes by 2020 from 6.3 million tonnes forecast for this year, said Bayu Krisnamurthi, chief executive of the Indonesia Estate Crop Fund.

"Biodiesel becomes the new demand for the palm oil industry," he said.

Palm oil demand from the food industry is also expected to rise next year.

China, which bought about 5.7 million tonnes of palm oil last year, is likely to take an additional 1 million tonnes in 2017, Zeng Guoqiang, general manager of the grains and oils division of Foretrade Investment Management Co, told an industry gathering in China earlier this month.