Malaysias crude palm oil prices on a high, until revaluation of ringgit

Mumbai, August 1 | Updated: Aug 2 2005, 05:30am hrs
The average crude palm oil (CPO) price in local Malaysian market hovered above the $368 level until the upward revaluation of the Malaysian ringgit on July 21, when prices in ringgit terms fell a few notches.

CPO prices suffered a 1.5-3% drop in ringgit terms after the unpegging of the Malaysian ringgit to the US dollar. Since palm oil is quoted in US dollars, a stronger ringgit would translate to lesser income for the exporters in the near term. In the longer term, the revaluation will have a lesser impact on local prices since supply and overseas demand for CPO are more important factors.

Malaysias CPO production dropped 7.1% to 1.2 MMT in June 2005 due to the trees undergoing biological stress. Post revised CPO production to 15.2 MMT in 2004-05 and 15.5 MMT in 2005-06 to reflect a better-than-expected improvement in yields. Carry-over stock level at the end of June eased to 1.2 MMT reflecting the drop in CPO output for the month but is expected to rise in the July-September quarter.

Low carry-in stock level propped the CPO prices in Malaysias local market above the $368 level during most of July. Industry sources indicate that an expected rise in demand would cushion the shortfall in the longer term.

The monthly average CPO price rose from $368 per million tonne (MT) in June to $371 per MT in July 2005. For comparison, the average CPO price for July 2004, was $388 per MT. The Refined/Bleached/Deodorized (RBD) Palm Oil FOB average price also rose from $384 per MT in June to $386 per MT in July.

US Department of Agriculture (USDA) expects a smaller growth in CPO production growth during the July-September quarter than 2004. However, even with a smaller estimate, total CPO output is likely to reach 15.2 MMT in 2004-05 (October-September). The Malaysian Palm Oil Board (MPOB) reported that total CPO production dropped 7.1% to 1.2 MMT in June 2005.

Both output in the Peninsula Malaysia and East Malaysias production declined by 3.8% and 12.1% respectively. Compared to June 2004, output during June 2005 was 3.1% higher. The decline in output was attributed to the trees undergoing some biological stress after three continuous months of high production and the erratic precipitation in late May and early June.

Lower PO output resulted in a further drop in carry-out stocks to 1.2 MMT at the end of June. With an expected higher CPO output and a small decline in CPO exports for the July-September quarter, USDA expects the carry-over stocks to be at around 1.3-1.4 MMT by the end of September.

Preliminary official PO exports rose from 1.3 MMT in May-1.2 MMT in June. PO exports further weakened in July ahead of heavier buying months of August-September, especially from India as it prepares for the celebration of Diwali on November 1.

CPO output had already reached 11.1 MMT for the first 9 months of 2004-05. With the USDAs current forecast of 4.1 MMT for the last quarter, CPO output has been revised upwards to 15.2 MMT for 2004-05 and 15.5 MMT for 20050-06. Some reasons cited for the increase in yields in the recent months are the improved yields from enhanced tree varieties in newly planted and replanted areas; an increase of area reaching peak fruit bearing stage and the relatively high PO prices have encouraged a sufficient usage of fertilizers which has positive impact on yields.

Besides, better cultural practices have resulted in better extraction rate of CPO (OER) at mills. The Board made a tolerance rate of 2-3% of unripe fruits at the mills. The average OER has improved from 19.8% during November 2003-April 2004 to 20.16% during November 2004-April 2005.

USDA foresees a decline in yields in 2005-06 to reflect the biological stress on the trees after a period of high production. However, the increase in fruit bearing area should partially offset the decline in yields. PO exports has also been revised slightly downwards while domestic usage has been higher than USDAs earlier expectation. Stocks at the end of 2004-05 have been adjusted upwards accordingly to about 1.36 MMT.