Palm oil may trade at a premium over soyoil

With oversupply of soyoil expected this year due to a bumper soybean crop in South America, palm oil is likely to change its historical trading course.

If Dorab Mistry, director of Godrej International and a vegetable oil industry expert is to be believed, palm oil may trade at a premium over soyoil, its nearest competitor, during 2010-11. So far, palm oil has been traded at a discount, up to 32 per cent, over soyoil. In rupee terms, the discount is even wider.

Speaking at the annual meeting of the National Institute of Oilseed Products in London on Monday, Mistry said, “The spread between crude palm oil and soyoil will remain very narrow in 2010 and, briefly, it is possible for palm oil to go to a premium.”

 

Historically, palm oil has been traded with a discount due to high availability from the world’s two largest producers, Indonesia and Malaysia. Crude palm oil production in Malaysia is estimated to have declined for the second year in a row, to settle around 17.2 million tonnes, due to the end of a high cycle and commencement of a new low cycle for palm trees, the new El Nino weather effect and a replanting programme.

Palm oil will also get support from its inherent use as bio fuel. The excess availability of palm oil is likely to reduce to a mere 0.8 mt between April 2010 and March 2011, from 1.5 mt between April 2009 and March 2010. Industry sources estimated the global soyoil supply would remain surplus by at least two million tonnes between April 2010 and March 2011, against an estimated deficit of 1.5 mt between April 2009 and March 2010.

Palm oil production in Malaysia can only be expanded by improvement in productivity. Much work has been undertaken on this and some improvement will be seen in the coming years. But, not a big one.

Additionally, the development of El Nino has put a question mark on the production prospects for Indonesia, with overall output is estimated to rise by only a million tonnes during the current season. Most of this increase was from expansion of acreage, which is coming to an end.

Expansion of acreage used to be around 500,000 hectares (ha) per year after 1997; this halved from 2008. The scope for increase in productivity is large because 30-40 per cent of planters are smallholders. However, it is a big task to get smallholders to embrace new technology.