Bunches of harvested oil palm fruit will be processed into oil, at IOI Corp.'s Pamol Kluang Palm Oil Mill, in Johore, Malaysia. Photographer: Munshi Ahmed/Bloomberg

Palm-oil prices may extend their decline to the lowest level in more than nine months as supply climbs in Malaysia, the second-largest producer, potentially helping trim global food costs.

The tropical oil may tumble 7.9 percent to 2,800 ringgit a metric ton ($931) by Sept. 30, a level last seen in early October, according to the median estimate in a Bloomberg survey of eight analysts. Inventories climbed 5.8 percent to 2.03 million tons in June in Malaysia and output increased 2.3 percent to 1.78 million tons, a separate survey of three analysts and two plantation companies showed.

Cheaper prices of palm oil used in instant noodles, margarine and soaps may cool global commodity costs, curbing inflation that has spurred more than two dozen countries to increase interest rates this year and containing expenses for Unilever and Nestle SA. Food prices tracked by the United Nations increased nine times in the past 11 months and in May, stayed near their record reached in February.

“The velocity of CPO production is unbelievable,” said Dorab Mistry, director of Godrej International Ltd., referring to crude palm oil. He correctly predicted last year that prices would climb to more than 3,000 ringgit. “I have never seen anything like this in Malaysia.”

Malaysian Supply

Palm oil climbed to 3,967 ringgit on Feb. 10, the highest level in almost three years, as global demand outstripped supply before reversing to close at 3,040 ringgit today, a 20 percent decline this year. The Standard & Poor’s GSCI gauge of 24 commodities tumbled 7.8 percent last quarter as wheat dropped 20 percent, cotton slumped 41 percent and oil retreated 11 percent.

Production from Malaysia may reach 17.6 million tons this year from 17 million tons in 2010, said Plantation Industries and Commodities Minister Bernard Dompok in March. The palm-oil board may increase its forecast to between 18 million and 18.5 million tons, Ong Chee Ting and Chai Li Shin, analysts at Maybank Investment Bank Bhd., said in a report on June 28.

“In the near-term we may see some weakness in production, as sometimes in the festive season they have less harvesting, but it should come back after July-August,” Arhnue Tan, senior investment analyst at ECM Libra Capital Sdn., said from Kuala Lumpur. Muslims observe a day-long fast during the month of Ramadan, which precedes the Eid festival and may start on Aug. 1.

Soybean-Oil Premium

Monthly production may climb as high as 2 million tons and stockpiles may reach 2.2 million tons, Tan said. Inventories of that size would be the highest since December 2009, according to board data. The peak production season is from June to October. The palm-oil board is scheduled to publish its estimates for production, stockpiles and exports last month on July 11.

Production climbed 14 percent to 1.74 million tons in May from April, the highest level in 19 months, the board said. Output jumped 15 percent to 4.69 million tons in the three months through May from 4.08 million tons in the year-ago period.

Global exports of 17 oils and fats will climb 4.6 percent to 70.3 million tons in the year through September 2012 from the year ago, Oil World said June 28. Palm oil may represent almost 56 percent of shipments, the Hamburg-based researcher said.

“While palm oil inventory is currently ample, the supply of soybean oil and rapeseed oil is tight, providing some floor to the price,” Maybank analysts Ong and Chai said.

That pushed the premium of soybean oil over palm oil to $243.26 a ton on June 27, the highest since January 2009.

Indonesia Production

These large discrepancies would probably spur so-called price-sensitive countries to shift away from soybean oil and rapeseed oil to the tropical oil, RHB Research Institute Sdn., said in a report dated June 30.

Supply from Indonesia, the world’s biggest grower, is expected to keep expanding at 10 percent to 12 percent each year, the nation’s trade minister Mari Pangestu said in an interview with Bloomberg Television on June 13.

The country may produce 25.4 million tons in the year beginning Oct. 1, up from 23.6 million a year earlier, according to U.S. government estimates.

“Production is expected to keep on increasing from now because the weather condition is being supportive and extraction is happening well,” Vimala Reddy, an analyst at Karvy Comtrade Ltd., said from the Indian city of Hyderabad, referring to the oil removal rate from fresh-fruit bunches.