KUCHING: Relevant crude palm oil (CPO) authorities; Oil World and the US Department of Agriculture have both given rather exuberant forecasts for global CPO production this year.

INCREASED PRODUCTION: Oil World thinks that total palm oil production could increase by some 3.4 million mt this year.

In its research report, ECM Libra Capital Sdn Bhd (ECM Libra) said that Oil World seemed to think that total palm oil production could recover by some 3.4 million metric tonnes (mt) in 2011, of which an additional 1.1 million tonnes would be produced by Malaysia and the rest from Indonesia.

This would bring 2011 production to 18.1 million mt and Indonesia’s production to an estimated 25.7 million mt, according to the research firm. It said that Indonesia still had the capacity to rise given that new maturities of up to 400,000 hectares (ha) could be coming into play over 2011. On the other hand, the USDA had similar forecasts of Indonesia adding more than two million mt of production and Malaysia crossing the 18 million mt mark.

ECM Libra also said that most La Nina weather pattern spikes were typically followed by an increase in production. Logically, this was acceptable as the palm tree was a water-loving plant and La Nina with its heavy rains would leave estates with favourable moisture content in the soil.

Comparatively, El Nino would have different implications as it would result in lower production some nine to 18 months down the road.

The latest developments in South American soybean supply saw the Brazilian harvest now starting to trickle through and this would be followed by the Argentinean harvest towards April. Typically, when the South American harvest commenced, exports switched from the US to Brazil and Argentina.

With Brazil expected to turn in a record crop and Argentinean prospects improving because of some rainfall, the soybean market had eased over the past week. In its monthly report, Oil World raised the Argentinean forecast by one million mt to 48 million mt on the arrival of rainfall.

Just last Friday, it made further upgrades to the Brazilian crop raising estimates to 71 million mt from 68.7 million mt previously, as the weather improved.

ECM Libra also mentioned that there had been a marked decline in China’s imports of vegetable oils which included palm oil compared with its intake of soybeans since 2007.

The research house revealed that from checks with players like Kuala Lumpur Kepong Bhd (KLK), the Chinese still typically considered soybean oil as its main edible oil while palm oil was used in the oleochemical industry.

Furthermore, it believed that this would be a continuing trend as; soybean oil no longer traded at a premium to refined palm oil. This move by China took some pressure off CPO supplies but the research house was mindful that exports to areas like Pakistan, the US, EU and Egypt continued to rise.

Nonetheless, it was a case of palm oil potentially losing its second largest customer.

To recap, the research house revisited correlation analysis and saw how things had come along over the span of 2010. Firstly, the correlation between crude oil and CPO had weakened significantly and there was also now a very strong correlation between CPO, soybeans and wheat prices.

In addition, ECM Libra said in order for CPO prices to trend further downwards, supplies in Malaysia and Indonesia would have to make a comeback. Nonetheless, it did not believe this was possible.

It also noted that the divergence between CPO prices and crude oil gave an indication that there were less speculative activities in the market than during the 2008 period. Also, the biodiesel reasoning for CPO to track crude oil was certainly weakening given the evident lack of viability of CPO as an effective biodiesel feedstock.

Spikes, in crude oil, as such, were least likely to induce a spike in CPO or even soybean prices.