Palm oil prices soar as Malaysian stocks fall short of demand

13-Apr-2009 - Last updated on 14-Apr-2009 at 09:44 GMT

Oilseed analysts are predicting a squeeze on supply of Malaysian palm oil for months to come, as prices are pushed up by farmers’ inability to invest in inputs and poor extraction rates – while demand for fried and oily food is not abating.

Malaysia is the world’s largest exporter of palm oil for food and cosmetic uses, totalling 15.4 million tonnes in 2008 according to the Malaysian Palm Oil Council. This means that tight supply and unfavourable growing conditions can have a major impact on prices and availability for industrial users.

However while prices climbed down from dizzying in the second half of 2008, palm oil futures hit a new seven-month high on Friday, when contracted oil for June closed at 2,299 ringgit ($636.3) per tonne on the Bursa Malaysia Derivatives Exchange.

The Times reported that demand for edible oils from newly industrialised countries is not abating in the downturn, as Western-style fried food has become ingrained in affluent Asian diets and is no longer seen as an expendable luxury. Moreover, government economic stimulus packages could mean that demand for certain foods falls does not fall as fast as one might think.

But while consumers seem to be just as prepared to shell out for oily foods, according to an article in The Times, palm oil consumption by October palm oil demand looks set to outstrip supply by about a million tonnes. IOI, a major planter in Malaysia, is expecting the high prices to remain at least until the end of this year.

Thomas Mielke, analyst for Oil World in Germany, said part of the problem is that oilseed farmers who are having investing in the necessary inputs so they can meet demand. “Lack of credit is a problem for farmers everywhere, and it is forcing them to cut back on fertiliser,” told the newspaper.

Low stocks in Malaysia

According to OSK Research, in the last month Malaysia’s inventory fell by 12.7 per cent to 1.363 tonnes. However production recovery in the second half of the year would replenish stocks – “if the rise is not matched by an increase in exports,” the analyst told Business Times.

Meanwhile, The Star reported today that the supply story could be the result of issues that will take longer to address, and will require improved agricultural practices. It said that the oil-extraction-rate, especially in Peninsular Malaysia, is below 20 per cent for the past 20 years, the result of poor quality soil used to grow palm oil in the 1960s.

Whereas oil palm in Sabah and Sarawek tends to be on land recently converted from rainforest, on the peninsular the land was used to plant rubber trees, and prior to that tapioca and gambir.

The Star reports that the Malaysian government recently initiated programmes to “encourage more aggressive replanting of unproductive oil palm trees with superior clones among smallholders”.

Oil switch out

Mielke predicts that he pressure on palm oil will have a knock-on affect on other oils, such as soy bean oil, rape seed oil and sunflower seed oil.

However the tight palm story could be, in part at least, the result of supply issues affecting other edible oils. For instance, soy bean oil from Argentina has been hit by drought in Argentina.

Moreover, Argentine farmers have been embroiled in strike action in recent weeks, refusing to sell their produce in reaction to the government’s refusal to reduce levies on soy – even though prices had dropped and the drought was taking its toll.