CPO futures market was suspended for five minutes

Three-month CPO (crude palm oil) futures broke the RM3,000/tonne support level yesterday and fell to a low of RM2,861/tonne. It closed at RM2,969/tonne. n According to AmFutures, the fall in CPO futures price yesterday was due to panic-selling and long-squeezing i.e. covering of positions. The CPO futures market was suspended for five minutes yesterday afternoon because of a glitch in the system. After the market opened again at 3.05 pm, traders started shorting CPO futures.

AmFutures said that a bill in the United States passed last week by the lawmakers also exerted downward pressure on CPO futures.

The US House Agriculture Committee approved legislation that would strengthen the Commodity Futures Trading Commission, giving it more power to rein in speculation. We believe that the measures are disclosure-based initiatives such as development of proposals that would require more detailed information from traders and improve effectiveness of agricultural trade options.

We are of the view that CPO price would continue to come under pressure due to a mismatch between supply and demand. World output of oilseeds is expected to overwhelm demand next year. According to USDA (US Department of Agriculture), the global output of oilseeds is estimated to expand 8% to 417 million tonnes in 2008/09F while ending stocks are forecast at 57.7 million tonnes in 2008/09F versus 56.7 million tonnes in 2007/08.

Despite recent reports that Malaysia plans to boost palm oil exports, increase local consumption to reduce record stockpiles and curb a decline in prices, we believe that these policies would take time to execute. At CPO price of RM2,900/tonne or US$890/tonne versus crude oil price of US$907/tonne or US$125/barrel, the cost of using CPO for fuel is marginally below fossil fuel.

We recommend to UNDERWEIGHT the plantation sector as high palm oil inventory levels underpinned by excess supply, would continue to dampen CPO price. For now, we are keeping our CPO price assumptions of RM3,000/tonne for 2009F and RM2,800/tonne for 2010F.