sector update 21 July 2008

Cautious outlook this week
OVERWEIGHT

Last Friday, plantation stocks plunged on the back of lower CPO (crude palm oil) futures price following a fall in crude oil prices. Three-month CPO futures eased RM43/tonne to RM3,392/tonne last Friday while crude oil was relatively unchanged.

Corn and soybean prices also closed lower last week. According to a CBOT (Chicago Board of Trade) report, corn prices ended down due to improving crop outlook underpinned by diminishing weather concerns while soybean prices retraced as Argentina has rescinded an export tax, which had sparked farmers’ protests in the past couple of months.

It is likely that sentiment on plantation stocks would remain cautious this week in spite of some positive news released by the US Department of Agriculture (USDA) last week.

In its latest projection, the USDA has trimmed its estimates for soybean harvested areas from 73.8 million acres to 72.1 million acres. Also, forecast of soybean yield has been revised downwards, resulting in 2008/09 soybean production being lower by 3.3% or 105 million bushels to 3 billion bushels. The projection of ending stocks of soybean have also been revised downwards by 20% from 175 million bushels to 140 million bushels for 2008/09.

After the revision in forecasts, soybean output are projected to rise 16% to 3 billion bushels in 2008/09 versus 20% previously while ending stocks are estimated to increase 12% to 140 million bushels in 2008/09 against the previous forecast of 40%.

According to USDA, although water levels in the Midwest have receded, there was little time for replanting. For nearly all of Midwest, 20 June was the final date to plant soybean crop fully covered by crop insurance.

As for palm oil, the Malaysian Palm Oil Board has forecast CPO output to rise 3% to 16.2 million tonnes this year while CPO production in Indonesia are projected to climb 6% to 14% to a range of 18.4 million to 19.8 million tonnes.After a bumper harvest in 1H2008, we expect CPO production in Malaysia remain softer in 2H. We reckon that the risk to prices is oversupply next year.

We would be coming out with a sector update soon. Our current recommendation on the sector is OVERWEIGHT. --amresearch