Palm oil futures dropped, despite data showing Malaysian stocks of the vegetable oil tumbling to a five-year low, as a retreat in exports this month, and the prospect of a huge US soybean crop, deterred investors.
Palm oil futures for November, the benchmark contract, stood 1.9% lower at their session low of 2,589 ringgit a tonne in late deals in Kuala Lumpur.
The drop came despite the Malaysian Palm Oil Board revealing that Malaysia’s stocks of the vegetable oil fell to 1.46m tonnes last month – the weakest since January 2011, and nearly 140,000 tonnes below market expectations.
The inventory figure, was down 17.3% month and month, was also down 41% from August 2015, also representing the biggest annual decline since January 2011.
The drop reflected both weaker-than-expected production and a bigger-than-forecast rise in exports which, at 1.81m tonnes, hit their highest since October 2011.
‘Getting tighter and tighter’
Factoring in increased consumption of the vegetable oil, the weak inventory data were even more remarkable, “showing supplies are just getting tighter and tighter”, said Ed Hugo, analyst at London broker VSA Capital.
However, the data were overshadowed by separate statistics from cargo surveyor Societe Generale de Surveillance, on Malaysian palm oil exports for the first 10 days of this month, showing a 15.0% decline on the same period of August.
“The data on 1-10 day exports often seem to determine price direction more than the stocks data,” Mr Hugo told Agrimoney.com.
Signally, the SGS data showed a marked drop – of one-third, to 67,700 tonnes – in Malaysia’s shipments so far in September to China, where restocking is seen as crucial to prospects for palm oil trade for now.
Soyoil vs palm oil
Furthermore, the drop in palm oil prices reflected a drop of 2.2% overnight in Chicago-traded futures in rival vegetable oil soyoil, after the US Department of Agriculture hiked by 140m bushels to a record 4.20bn bushels its estimate for the US soybean harvest – a bigger upgrade than investors had expected.
The estimate for US soyoil production was lifted by 60,000 tonnes to a record 10.22m tonnes (22.53bn pounds), a rise of 200,000 tonnes year on year.
“The increased prospects for US soyoil supplies will likely constrain palm oil price prospects,” especially a time of a relatively small discount of palm oil to soyoil, Mr Hugo said.
‘Flush’ yields ahead?
The weakness in Malaysian palm oil production is particularly significant in that it comes as output is approaching its seasonal peak, typically in September or October.
Indeed, it may suggest a more significant hangover to output from El Nino-inspired dryness than many observers acknowledged last month, when soft data for July were attributed in part to labour shortages stemming from Ramadan celebrations.
Data from Indonesia-based palm producers REA Holdings and, on Monday, MP Evans has suggested a worse setback from dryness in the April-to-June quarter than in the January-to-March quarter.
MP Evans said that the impact of dryness may not be over yet, but flagged potential for, potentially, significant, yield improvement ahead as the benefit feeds through of improved rainfall.
“Once a more normal pattern of rainfall re-establishes itself, the palm begins a new cycle of production, often resulting in a period of ‘flush’ yields 18-24 months after adequate moisture is again available,” MP Evans said.
“The extended dry period that affected the group’s results in the [first half of 2016] has come to an end.
“However, the beneficial effects of renewed rainfall can take up to six months to produce a resurgence in crop and up to 24 months fully to overcome the effects of drought.”