Palm oil may drop to less than 3,000 ringgit a metric ton as output expands, before prices rally on growing use of soybean oil in U.S. biodiesel, Dorab Mistry, director of Godrej International Ltd., said today.

“I expect the 3,000-ringgit support to be penetrated, and prices could go even lower,” Mistry, who has traded palm oil for more than three decades, told a conference in Beijing. “After August, or whenever soya oil usage in U.S. biodiesel production is substantially raised, we shall see prices rally. A few weeks after that development, prices can begin their journey towards 4,000 ringgit.”

Palm oil has slumped 15 percent since climbing to a 35- month high of 3,967 ringgit ($1,314) a ton on Feb. 10, as drier weather boosted yields after rains had hurt output. The contract for June delivery dropped 1.4 percent to 3,368 ringgit at the midday trading break in Kuala Lumpur.

World food prices climbed to a record in February, according to a United Nations’ Food & Agriculture Organization index, before declining last month for the first time since June. Costlier food contributed to riots across northern Africa and the Middle East that toppled leaders in Egypt and Tunisia and is driving up inflation, spurring central banks to consider higher interest rates that may slow growth.

Food Prices

Food-price inflation may “moderate” in the coming months because of improving weather, Mistry said. Drought in Russia, South America and China, flooding in Australia and heavy rains in parts of Asia curbed harvests of food crops in the past year.
Palm oil output this year will be at least 3 million tons higher than in 2010, he said. The supply of soybean oil may increase by almost 3 million tons, while supplies of all oils and fats will expand by as much as 6.5 million tons, compared with demand growth of 5.5 million tons, he said.

“We see that recovering production will be an ongoing trend due to improved weather conditions as well as the end of the biological down-cycle,” Bernard Ching, an analyst at ECM Libra Capital Sdn., wrote in a report today, referring to palm.

Output in Malaysia, the second-largest producer, gained 29.4 percent from the previous month to 1.42 million tons in March, the steepest monthly gain since June 1999, according to data from the Malaysian Palm Oil Board released yesterday.

‘Undeniable Evidence’

“There is undeniable evidence of rising palm oil production,” Mistry said. “We now need higher U.S. biodiesel production in order to preserve current high prices.”

Crude oil’s advance to a 30-month high on April 8 lifted the appeal of vegetable oils for biofuel.

“The expectation that high crude oil prices will last for the next several months must keep biodiesel demand buoyant,” said Mistry, who correctly predicted last year that palm oil would rise to more than 3,000 ringgit. The pace of biodiesel production may pick up from April onwards, he said.

Global biodiesel demand is expected to expand by 2.5 million tons this year, Mistry said on March 9. This forecast may rise to 3 million tons over the next few months, he said today. Biodiesel output in the U.S. will grow to 3.3 million tons, from 1.1 million last year, he said on March 9.

“U.S. biodiesel is going to be the story of the second half of 2011.” Mistry said. “I call the biodiesel situation the gathering storm of 2011.”

Indonesian Output

Soybean oil rallied to 61 cents a pound yesterday, the highest price since July 2008, and may climb to 70 cents if U.S. biodiesel output expands, Mistry said. Soybean oil’s premium over palm oil widened to $205.17 a ton on April 8, the most since October 2009, boosting the appeal of the cheaper oil.

Indonesian palm oil production this year may increase by 2.5 million tons to 25 million tons, Mistry said. An earlier estimate of 17.3 million tons for Malaysian output may be “too low,” he said, without giving a new forecast.

Output from Malaysia may be 17.6 million tons, compared with 17 million tons in 2010, Bernard Dompok, the nation’s Plantation Industries and Commodities Minister, said on March 8. That would match production in 2009 and compare with 2008’s record 17.7 million tons, according to official data.