Rise in Palm Oil Output May Help Satisfy Food Demand

Strong production of Southeast Asian palm oil is the best hope of boosting cooking oil supplies as soybean oil gets soaked up to make biofuel, its attraction redoubled by unrest in Libya that has driven crude oil to more than $100 per barrel.

Vegetable oil markets had braced for a fall in palm oil prices in the second half of 2010. They expected strong output from top producer Indonesia as it harvested a bigger acreage, and as No. 2 supplier Malaysia improved yields.

However, the threat of unrest in Libya disrupting crude oil supplies has brightened biofuel’s allure, which could prompt farmers in the Americas to channel soy oil into the energy sector to profit from high prices and demand.

Palm oil will then have to fill the food gap as countries buy more of it to rein in soaring food prices and fend off civil unrest. Malaysian palm oil has dropped nearly 3 percent this year, although rising food demand could wipe out the losses in the first quarter.

“Looking ahead, it appears likely that there will be an increasing onus on palm oil to help ease the current tightness in world vegetable oil supplies,” said Anne Frick, senior oilseed analyst with Prudential Bache Commodities. “Consumption of vegetable oils, particularly soybean oil, in industrial usage is increasing.”

The dynamics between palm oil and soy oil, which compete for use in cooking oil, margarine and biofuel, will dominate this week’s Bursa Malaysia Palm Oil Conference, which draws nearly 2,000 delegates from the global edible oils industry.

Expectations that palm oil can bridge the supply gap come as Malaysian officials bank on well-distributed rains and at least 1,900 hours of sunshine this year to lift output by 3.6 percent to 17.6 million tons. Excessive rains brought by the La Nina weather phenomenon over this year and last have disrupted palm oil output, but this will refresh the trees that suffered from a dry spell in 2009.

Indonesia is gunning for a jump of 9 percent to 22 million tons in 2011, confident of half a million hectares of oil palm estates coming into maturity three years after record estate expansion in the earlier price boom.

“Second-half production should be better,” said Michaela Kuhl, an analyst with Commerzbank. “La Nina’s high point is in the past. What was very bad over the last month might prove not too bad for the near future.”

With palm oil and soy oil’s stocks to use ratio at multi-year lows, though, there may be no room for weather-related supply shocks as prospects for biodiesel demand grow. Production of soybean for crushing in Brazil could hit a new record on favorable weather, and timely rains have increasingly brought relief to Argentina’s parched crops.

The markets are also eyeing bumper US soy plantings this spring, but the government says the harvested crop may fail to replenish sparse stocks, keeping vegetable oil prices on the boil.

“There is a lot of uncertainty usually until that time [June] — how big is the crop going to be, what is the yield,” said Reinier Kelder, vice president of procurement at Dutch food group CSM. “I expect quite a lot of price volatility and uncertainty, certainly for the next three to four months.”

Crude oil prices at more than $100 a barrel, accompanied by record world food prices, will rekindle a debate over using food crops to make fuel when millions around the world go hungry.

Palm oil is unlikely to be in the picture for now, as the push for its use in biofuels remains slight.

In contrast, the surge in crude oil makes soy oil-based fuel competitive with help from tax credits for blending in the United States and aggressive biodiesel expansion in Brazil and Argentina.

Palm oil may track volatility in crude oil prices as unrest in the Middle East spreads and weather uncertainties continue, said Chong Kim Seng, chief executive of Bursa Malaysia Derivatives.

“If you go back to when palm oil was seen as a food crop, it was very stable, no volatility, but once you get plugged in to the energy sector, you never know,” he said.

Reuters, Bloomberg