Low palm oil output in Indonesia and Malaysia drags down global prices

Crude palm oil (CPO) production in Indonesia and Malaysia is expected to decline due to the impact of the El Nino weather phenomenon that has brought a prolonged dry season to Southeast Asia.

Malaysia may only produce 19 million tonnes this year, while Indonesia's output is estimated at 31 million tonnes.

CPO production in Malaysia could fall between 1.5 and 2 million tonnes this year, according to Dorab Mistry, Director at Godrej International, an Indian business conglomerate.

Declining output in the world's two leading palm oil producers and exporters implies that palm oil prices should be able to rise further.

At the start of this week palm oil futures traded in Kuala Lumpur (June delivery) rose to 2,779 ringgit (approx. €614.5) per tonne, the highest level since March 2014, and they may rise further to 3,000 ringgit (approx. USD $751) before the year-end.

Another factor that supports higher palm oil prices is Indonesia's biodiesel programme, which produces about 200,000 tonnes of palm oil-derived biodiesel each month.

This implies that palm oil demand is relatively strong due to higher demand from Indonesia, while demand from key export markets such as India and China remains sluggish, and also gives rise to estimates that Indonesia's palm oil export has plunged to about 1.95 million tonnes in February.

The latest data from the Indonesian Palm Oil Producers Association (Gapki) show that Indonesia exported 2.1 million tonnes of crude palm oil in January 2016, down 16% from the export volume one month earlier.

Expectations of lower soyabean output in the US also encourage higher palm oil prices, as soyabean oil and palm oil dominate the global edible oil market, accounting for about 60% of the world’s total edible oils production.

As both commodities can substitute each other, food processors tend to switch between both commodities depending on prices.

A big soyabean harvest causes the soyabean price to fall and therefore food processors would prefer to purchase soyabean oil, implying weakening demand for palm oil and weakening palm oil prices.

In the current context, however, palm oil faces little competition from soyabean oil.

In line with expectations, Indonesia's Trade Ministry announced at the start of the week that the nation keeps its export tax for crude palm oil at 0% in April.

Together, Indonesia and Malaysia produce about 86% of the total palm oil supply worldwide.

Palm oil is an edible oil used in various sectors such as biodiesel, cosmetics, and food.