CPO prices to get full La Nina effect by end-May

Rising La Nina weather risks:
- threatening major oilseeds and grain growing areas in the US in March and April and South America, by end-May 2009.
- affect the harvesting season for soybean in Brazil and
- Argentina from February to April.

All will depend on the length (time frame) of the La Nina weather pattern in 2009.
The world encountered a lengthy La Nina phenomenon from 1998 to 2001.

In 2001 - US farmers planted 1.6% less acreage of soybean and 4.8% less acreage of corn due to the wet weather caused by La Nina.

In Malaysia, abnormal heavy rainfall early last year created floods in major oil palm plantation areas like Johor and Pahang, giving a short-term boost in CPO prices.

Meanwhile, plantation stocks were traded higher on Bursa Malaysia yesterday as the CPO price closed above RM1,600 per tonne in line with soybean oil gains on the overnight Chicago Board of Trade.

On Bursa Malaysia Derivatives, the benchmark CPO for March delivery closed RM81 higher at RM1,671 per tonne.

Palm-based biodiesel would become critical to palm oil pricing over the next six to eight months.

Demand for rapeseed, soy and palm oils used for biofuel production will increase from 10 million tonnes in 2008 to nearly 12.5 million tonnes in 2009.

On Tuesday, CPO moved up to RM1,670 per tonne because crude oil jumped to US$40 per barrel.

CPO at RM1,670 translates to US$65 per barrel, in other words CPO is 60% costlier than crude oil.

For 2009, global palm oil production will ease off to about 2.6 million tonnes from 4.5 million tonnes in 2008.

Soy oil production will also decrease to 1.15 million tonnes in 2009 compared with 1.82 million in 2008.

However, supply of vegetable oils will increase to 6.9 million tonnes in 2009 from 5.5 million in 2008.

But total demand for global vegetable oils is estimated to grow only to six million tonnes in 2009.

In other words, the world will have a surplus of vegetable oils in 2009.

We also need to ask what would happen if food demand did not grow as expected given the severity of the economic downturn with consumers cutting back on food and fuel consumption.

In that scenario, the best saviour for palm oil could be biodiesel.

To maintain CPO prices at RM1,800-RM1,900 per tonne, Malaysia, Singapore and Indonesia need to convert more CPO to biodiesel.

Production of three million tonnes of biodiesel from about 12 biodiesel plants in South East Asia in the next 12 to 15 months would result in lower palm oil inventories.

It is important to note that CPO at RM1,500 to RM1,600 per tonne does not provide adequate operating margins to plantation companies for reinvestments due to the steep hike in input costs over the past 18 months.