Palm oil output and stocks, already lagging robust demand due to rains in top Southeast Asia producers, could be made worse should the cooking ingredient become the next target for emerging markets seeking to buy big and dampen adverse effects of booming world food prices.
As governments from India and Thailand to Egypt act to quell soaring food inflation and public anger, world cooking oil supplies look uncertain as the impact of dry weather and social unrest in the Argentine soy crushing sector lingers.
A scramble for palm oil may see world consumption outpace production, going beyond a supply deficit of 246,000 tonnes as seen in US Department of Agriculture data in the current marketing year to September. This scenario is set to further boost benchmark Malaysian palm oil futures that hit a three-year high on Wednesday and might bring the market well above the 4,000 ringgit level soon.
"The increase in CPO (crude palm oil) prices is real. It is inline with the increase in rice and any other food price," said Leonardo Gavaza, analyst at Bahana Securities. "The Egyptian demonstrations will make some countries think about the kind of initiative to buy directly all commodities, to maintain their own inflation. The government of Indonesia is already pushing plantation companies to increase production."
Global food prices hit a record high in January, the UN Food and Agriculture Organisation said on Thursday, adding that prices, already above the 2008 levels which sparked riots, were likely to rise further. Concerns of a food supply squeeze spread to cooking oil when rains this week triggered floods in Malaysia, the world's No 2 palm oil producer, submerging estates and cutting off roads that slowed deliveries.
In the same week, Thailand, usually self-sufficient, announced plans to buy 120,000 tonnes of crude palm oil to ease a domestic cooking oil shortage, a move that may spur other bigger importers to stock up. "The demand that we're seeing is food-driven, not fuel or speculation like we saw back in (the highs of) 2008," said a palm oil analyst, referring to when the vegetable oil hit a record 4,486 ringgit per tonne along with other commodities.
Egypt, a palm oil importer, was also rocked by civil unrest related to soaring food prices and top trader Cargill reported of more food stockpiling in the region. "We are bullish and at the cross roads," said Abah Ofon, a Singapore-based analyst with Standard Chartered bank. "We have social tensions in Argentina affecting oilseed imports and there is the threat of floods hanging over Malaysia and Indonesia." "Such news will trigger higher prices and if not handled carefully, it can cause a voter backlash to various governments of big importing countries."
SCRAMBLE ON? Traders will focus on the next moves by India and China as the world's top two palm oil buyers use monetary policy tools and food cost measures to rein in rising inflation.