Higher palm oil output to cap prices, depending on El Nino

Mon Aug 4, 2014 3:47am EDT

* Threat of El Nino eases, but not completely ruled out

* Malaysian output may be capped by tree stress, Indonesian yields to surge

* Malaysian stockpiles seen hitting close to 2 mln tonnes in Sept

* Prices to be trapped between 2,300-2,600 rgt in absence of El Nino

By Anuradha Raghu

KUALA LUMPUR, Aug 4 (Reuters) - Palm oil production in top growers Indonesia and Malaysia could pick up in the final months of this year, keeping a lid on prices, although some in the market are still worried about a potential El Nino plus tree stress in Malaysia.

Crude palm prices in Malaysia <0#FCPO:> have tumbled more than 15 percent this year, due in part to a bumper harvest of rival soybeans. On Monday the benchmark October contract was down 1.1 percent at 2,260 ringgit ($706) per tonne at midday.

The El Nino weather phenomenon, a warming of sea temperatures in the Pacific, can drench parts of the globe and parch others, damaging crops and food supply. Worries about an El Nino made many cautious about the palm crop initially this year.

However, Malaysia, the second-biggest producer, churned out 9.1 million tonnes of crude palm oil between January and June, up from 8.4 million in the same period last year.

"Output will be good. It is already showing signs of double-digit growth," said a trader with a Malaysian commodities brokerage. "In another two or three months, we're going to get close to 1.9 to 2.0 million tonnes of stocks."

Malaysian stocks stood at 1.66 million at the end of June.

The Malaysian Palm Oil Board, the industry regulator, sees output hitting a record 19.5 million tonnes this year versus 19.2 million in 2013.

Not everyone expects such a surge. Some planters say output will be capped by the delayed impact of a short drought earlier this year.

"Production will pick up but the big question is by how much," said Carl Bek-Nielson, chief executive of Danish-Malaysian United Plantations.

"We don't expect a bumper crop in the second half as a function of the very dry weather and the stress the palm tress were exposed to in the first half," he added.

Fears of an El Nino have not entirely disappeared, either.

The Australian Bureau of Meteorology said on July 29 that Pacific Ocean temperatures had eased in recent weeks but that an El Nino could not be ruled out, even though it was "increasingly unlikely to be a strong event" if it did occur.

"Overall, output could be higher, but it is subject to the El Nino effect," said Puru Kumaran, chief financial officer at IJM Plantations Bhd. "We really don't know whether there could be an effect that could hit towards the last quarter of the year."

INDONESIAN OUTPUT TO RISE

The outlook for crude palm oil output in Indonesia, the world's biggest grower, has turned round recently.

The Agriculture Ministry said in mid-July that output in 2014 had initially been forecast to drop 15-20 percent due to the predicted El Nino, but now it was expected to reach 29.5 million tonnes, up 6.3 percent from 27.8 million in 2013.

Indonesia and Malaysia together account for 85 percent of the world's palm oil.

Bumper supplies of soybeans for crushing into soyoil could depress prices of the rival edible oil and turn price-sensitive buyers away from palm oil unless its prices fall, too.

"There's a lot of competition from soybean oil. It really depends on the prices. If palm is priced cheap enough, the demand will be there," said Ivy Ng, an analyst at CIMB Research in Kuala Lumpur.

Refined palm olein currently trades at a discount of about $90 to soyoil <0#AMSOYOIL-AR>, compared to about $60 at the start of 2014 and $300 in January 2013.

Ng expected palm prices to trade between 2,300 and 2,600 ringgit a tonne for the rest of the year, a little above the current level.

"I don't think it can break out of that range unless something drastic happens to the weather in the U.S. or in the palm oil region," she said.

Other analysts have also turned more bearish. Kenanga Investment Bank's Alan Lim has slashed his forecast for average prices in 2014 to 2,500 ringgit per tonne from 2,800 ringgit, citing lower estimates for soybean oil prices. ($1 = 3.200 Malaysian Ringgit) (Editing by Alan Raybould)