Palm oil stockpiles in Malaysia, the second-biggest grower, dropped for a second month in August as output declined during the Muslim fasting month of Ramadan.

Inventory of the edible oil, used mostly in food, fell 5.6 percent to 1.88 million metric tons from 2 million tons in July, the Malaysian Palm Oil Board said in a statement today. That was lower than the median estimate of 1.9 million tons in a Bloomberg News survey of three analysts and two plantation companies last week.

Falling inventories may help stem a decline in prices, which have slumped 23 percent from a 35-month high of 3,967 ringgit ($1,308) a ton on Feb. 10, and raise costs for users including Nestle SA and Unilever. Output fell to 1.67 million tons in August from 1.75 million tons in July, while shipments declined 2.7 percent to 1.69 million tons from a record 1.74 million tons in July, the board said.

“In the near term, there is some upside potential” for prices, Ben Santoso, a plantation analyst at HwangDBS Vickers Research Sdn., said by phone from Singapore today. “If the inventory goes down, then it helps.”

Palm oil for November delivery gained as much as 0.9 percent to 3,076 ringgit a ton and traded at 3,056 ringgit at 3:16 p.m. in Kuala Lumpur. The commodity has increased 14 percent in the past year.

Exports Drop

The “export drop was slightly less pronounced than production, so that naturally led to stockpiles dropping,” Arhnue Tan, senior investment analyst at ECM Libra Capital Sdn., said by phone from Kuala Lumpur today. The data was “pretty much within expectations, especially the drop in production, since it was Ramadan month.”

Output in Malaysia and Indonesia, the biggest growers, usually declines during Ramadan, which began Aug. 1 and preceded the Eid festival on Aug. 30 this year, as foreign workers head home for the festivities or work shorter shifts. Harvest typically peaks between July and October.

Production may rebound in September as workers return from holidays and boost stockpiles, Tan said.

“Exports should be flat, I don’t see any festivals coming up that could drive exports, except for Diwali, but that’s just one country,” Tan said, referring to India where the majority of the population is Hindu.

Production in Malaysia is forecast to reach 18.3 million tons in the 2010-2011 season, compared with 17.8 million tons a year earlier, the U.S. Department of Agriculture said in a report dated Sept. 2. Stockpiles at the end of September are expected to decline to 1.86 million tons as the outlook for exports looked “bright”, it said.

Production totaled 12 million tons in the January-August period, 8.2 percent more than a year earlier, while shipments have gained 3.8 percent to 11.3 million tons, according to the board data.

Exports fell 36 percent to 337,038 tons in the first 10 days of September from a month earlier, independent market surveyor Intertek said on Sept. 10.