More unpredictable weather
OVERWEIGHT
Unpredictable weather is expected to support vegetable oil prices in the coming six months. After the massive Midwest floods in the United States, it appears that the US Corn Belt could be facing a heat wave.
According to yesterday’s CBOT (Chicago Board of Trade) report, corn and soybean prices recorded gains after increasing market talks of potentially hotter and drier weather conditions. The gains in vegetable oil prices were in spite of another 3% fall in crude oil prices to US$135/barrel.
December corn prices rose 10.5 US cents to US$6.77/bushel while August soybean prices inched up 31 cents to US$15.73/bushel. Yesterday, the 3-month CPO (crude palm oil) futures price declined RM94/tonne to RM3,466/tonne.
It appears that CPO prices would continue to hover between the RM3,400/tonne to RM3,600/tonne range in the coming six months underpinned by unpredictable global weather pattern. If the output of corn and soybean falls below expectations, then this would sustain vegetable oil prices further. According to MPOB, the average monthly price discount between CPO and soybean oil expanded to 21% in June against 16% in May.
Currently, the US Department of Agriculture forecasts soybean production to rise 20% to 3,105 million bushels in 2008/09 while ending stocks are estimated to expand 40% to 175 million bushels.
In Malaysia, CPO production could soften in 2H2008 after a bumper harvest in 1H2008. Industry players have said that this production trend is the opposite of production pattern in other years when 2H is traditionally a stronger output period.
Malaysia recorded CPO production of 8.2 million tonnes in 1H2008, 23% higher than 6.7 million tonnes in 1H2007. For the full year, MPOB has projected the country’s CPO output at 16.2 million tonnes, 3% higher than last year’s 15.8 million tonnes.
We maintain our CPO price assumption of RM3,500/tonne for 2008 as it appears to be achievable based on current prices. In terms of stock recommendation, we like the bigger and integrated players such as IOI Corporation and KL Kepong. On the SGX (Singapore Stock Exchange), we favour Wilmar International and Indofood Agri-Resources. --amresearch
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