Palm Oil Special: Higher Production Will Restrict Further Rise

MUMBAI (Commodities control)- Malaysia and Indonesia the primary suppliers of palm oil have significed in very clear manner that the production cycle is now on roads to recovery after a lower production cycle since August last year. From March onwards production in both the key suppliers is expected to shoot up which will ease the tight squeeze in spot availability. It might help prices to cool off from record high levels.


The aggressive bullish movement in edible oils and oilseeds complex in past four weeks took the market to test fresh highs in many years. Sunflower oil Black sea FOB gained the most amongst all oils to rise by $400 or 31% in last four weeks to trade at $1710 /MT. While Argentina Soy oil FOB rose to $1248/MT up by $200 or 16% in same time frame and crude palm oil FOB Indonesia were up by $70/MT or 6% to $1115/MT. Sun oil and palm oil prices reached their highest in 13 years while Soy oil in 8 years.

Sun oil prices are commanding unusually high premium over the rival soft oils and palm oil. Price sensitive consumers have already started switching to the cheaper soy oil pushing the Argentina Soy oil FOB to unusually high levels. The Soy oil production will increase as the crush season peaks during April/June 2021 quarter in South America. Palm oil prices have gone through the roof due to the anticipation of lower production along with falling palm oil stocks at the origins. The supply of palm oil will revive as per higher production seasonality during March/August.

Palm Oil: Moving Towards Higher Production Cycle

Malaysian Palm oil production has plummeted to 10-year low of 6.8 M MT in Oct/Feb 2020/21 as the average yield of plantations has fallen to lowest in 20 years. Higher imports from Indonesia partly provided relief to shortening stocks but the overall exports from Malaysia were down by 9% during the Oct/Feb 2020/21. Lower production has squeezed palm oil availability in Malaysia resulting in stocks falling to as low as 1.32 M MT by end of February 2021.

Going forward, Malaysian palm oil production will pick up. For March 21 production may rise by at least 20% M-o-M basis. Palm plantations are relatively healthier due improved weather conditions in last one year. However, the labor shortage continues to remain major risk. Despite favorable weather, the Malaysian production has been falling, mainly due to the labor problems. Even if the yield improves it will be in vain if plantations are unable to harvest the crop. It will remain a major factor impacting supply over next quarter. Malaysian palm oil end stocks are expected to improve towards 1.45/1.50 M MT for March 21 and improve in subsequent months considering rising production and demand rationing due to the high prices.

Malaysia Palm Oil Bs in Million MT
Attribute	2016/2017	2017/2018	2018/2019	2019/2020	2020/2021
Beginning Stocks	1.46	2.02	2.53	2.50	1.76
Production	18.86	19.68	20.80	19.26	19.60
Imports	0.63	0.54	1.06	0.79	1.00
Total Supply	20.95	22.24	24.38	22.55	22.36
Exports	16.31	16.47	18.36	17.21	17.28
Industrial Dom. Cons.	1.89	2.47	2.72	2.72	2.70
Food Use Dom. Cons.	0.67	0.70	0.74	0.78	0.80
Feed Waste Dom. Cons.	0.07	0.07	0.07	0.08	0.08
Domestic Consumption	2.62	3.24	3.52	3.57	3.58
Ending Stocks	2.02	2.53	2.50	1.76	1.51

The supply outlook for Indonesia is more favorable due to availability of manpower and favorable climatic conditions. Expect a good recovery in palm oil production in Indonesia from March 21 onwards augmenting falling stocks and meeting the steady demand.


Malaysia’s loss has been a gain for Indonesia. Global dependence on Indonesian palm oil is increasing this year to compensate reduced Malaysian supplies. The rising crude oil prices will also encourage the consumption of palm oil based B30 biodiesel. Higher palm oil production and steady demand will result in Indonesia palm oil stocks to improve from March 21 onwards.

Overall palm oil supply from both Malaysia and Indonesia are expected to improve from March 21 onwards after suffering heavily in past couple of quarters. The palm oil demand is expected face fierce competition ahead of peak supply season of rival soy oil.
Palm Oil Price Outlook.


BMD CPO futures made a high of 4211 RM/MT in April contract. There is no doubt that lower than expected palm oil stocks in Malaysia and spill over strength from soy oil and sun oil contributed to the steep uptrend in palm oil prices.

In absence of the excessive strength in soft oils prices and improved pace of production, palm oil prices are likely to correct in coming weeks.
We expect BMD CPO futures to correct towards 3300/3400 RM/MT in coming months. For MCX CPO 1M contract, we expect prices to move towards 980/1010 Rs/10 KG.

BMD CPO and CBOT Soy oil spread is one of primary benchmark for spread analysis of edible oil complex. Above chart gives a detailed perspective at how the spread has behaved historically and understand what lies ahead.

It fits the fundamental story of increasing supply of CPO from March onwards while it will take another fortnight for peak supply season of soy oil to come. We can ascertain from above chart that CPO prices will remain weaker as compare to Soy oil prices and may fall proportionately more than soy oil.

MCX CPO – NCDEX Ref soy oil spread conveys similar story as we observed in BMD CPO- CBOT Soy oil charts. Spread has hit the ceiling and may not widened any more from current levels. Which indicates towards falling of CPO prices on immediate basis while the spread normalizes.

Mustard oil – CPO spread helps to understand the domestic market dynamics. It clearly visible from the charts that the CPO prices have hit the ceiling and now looking towards correction to normalize the spread with mustard oil.