Malaysian palm oil futures rose to their highest in nearly two years with dry weather expected to limit output, resulting in falling inventories in Malaysia and as competing vegetable oils moved higher. The palm oil contract for May delivery on the Bursa Malaysia Derivatives Exchange hit 2,694 ringgit per tonne on Friday, the highest since April 17, 2014, before settling at 2,679 ringgit ($662) at the end of the trading day, up 0.9 percent from its previous session.
Trade volumes were 39,842 lots of 25 tonnes each in a day. The market is partly supported by forecasts of lower palm oil production due to dry weather that should cause lower inventory levels at the end of March, said a trader at a Kuala Lumpur-based brokerage. "March end-stocks will still be down from a month ago," the trader said.
Lower inventories in the world's second-largest palm producer may cause benchmark palm prices to rise to 2,700 ringgit to 3,000 ringgit as a crop damaging El Nino reduces palm's fruit yields, according to leading industry analysts. Malaysian output in March should rise from February, which came it at the lowest in nine years, in line with seasonal trends. However, production growth should be capped due to the impact of the El Nino weather phenomenon that tends to bring drought conditions to Southeast Asia.
Palm production in the first half of March is up about 10 percent from February, said the trader. Rising prices for competing vegetable oils also supported palm oil prices on Friday. The September soybean oil contract on the Dalian Commodity Exchange was up 1.6 percent, while the May Chicago Board of Trade soyoil contract gained 0.5 percent. "Sentiment is higher riding on external markets, such as Dalian and Chicago (Board of Trade)," said a second trader from another brokerage firm in Kuala Lumpur. France adopted a proposal on Thursday to impose an additional tax on palm oil from 2017. The progressive tax aims to reflect the environmental damage caused by palm oil plantations. The tax starts at 30 euros next year and rises to 90 euros by 2020.
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