Palm Oil Drops Below 2,000 Ringgit First Time Since 2009 on Glut

Aug 22, 2014 6:14 am ET

Aug. 22 (Bloomberg) -- Palm oil tumbled below 2,000 ringgit ($633) a metric ton for the first time in more than five years as forecasts for a record U.S. harvest of soybeans used to produce an alternative oil threaten to curb demand.

Futures dropped as much as 2.5 percent to 1,989 ringgit on the Bursa Malaysia Derivatives, the lowest level since March 2009, and closed at 2,000 ringgit in Kuala Lumpur. Prices are down 25 percent this year, heading for the third annual decline in four years.

Palm entered a bear market last month as favorable weather boosted the outlook for U.S. soybean crops, estimated to be the largest ever. Futures also slumped as demand for biofuels missed expectations and forecasts for an El Nino weather, which can disrupt supplies, were scaled back. The Department of Agriculture may raise its soybean output estimate next month, said Gnanasekar Thiagarajan, head of trading and hedging strategies at Kaleesuwari Intercontinental Singapore.

“This is probably the biggest supply that we have seen for U.S. soybeans and this is weighing on other oilseeds and palm is indirectly affected by this,” said Alvin Tai, an analyst at RHB Investment Bank Bhd. in Kuala Lumpur. “The weakness probably won’t last beyond September. We have peak production coming up in September, so after that production will start to taper off,” he said, referring to palm oil.

Production in Malaysia may reach a record 19.7 million tons to 19.9 million tons, while Indonesia’s output may total an all- time high of 30.5 million tons or more this year, according to Dorab Mistry, director at Godrej International Ltd. The two Southeast Asian producers together account for 86 percent of world supplies.

USDA Estimate

U.S. farmers will harvest a record 3.816 billion bushels this year, compared with 3.8 billion estimated in July, USDA said Aug. 12. World inventories before the start of the 2015 Northern Hemisphere harvests will rise 28 percent to a record 85.62 million tons, the agency estimates.

“The last USDA report was a bit conservative, the estimates could be higher in September,” said Gnanasekar. “The USDA was probably worried about possible weather hindering the crop estimates in August.”

Palm oil may drop to 1,700 ringgit in the coming months if the USDA raises soybean estimates, said Gnanasekar.

Soybean oil traded at 33.02 cents a pound on the Chicago Board of Trade, after touching 32.76 cents on Aug. 20, the lowest level since September 2009. Soybeans slumped to $10.35 a bushel on Aug. 20, the lowest since September 2010. Palm’s discount to soybean oil shrunk to about $95.69 a ton today from an average of $244 in 2013, data compiled by Bloomberg show.