Is This the End of High Palm Oil Prices?

Since the beginning of the year, the palm oil market has experienced ups and downs, driven by international crude oil prices and export policy restrictions in the main producing countries, BMD palm oil has driven DCE palm oil to break through the previous highs, especially BMD palm oil hit a record high continuous contract reached a high of 7268 Malaysian ringgit per ton..

The more fundamental reason for this is that the international supply of palm oil has been significantly constrained by the marked decline in palm fruit yields in Malaysia and Indonesia due to dry weather. But due to the Indonesian government's determination to develop biodiesel as an alternative energy source and the emergence of palm oil, there was huge marginal increase in consumption on the demand side, which is the core driver of this round of palm oil price increase.

In addition to the core drivers, Malaysia was affected by the epidemic and labour numbers were greatly reduced, resulting in the country's palm oil output being constrained. South American soybean production areas were affected by the weather with reduced soybean production and reduced soybean oil supply, and the escalating situation in Russia and Ukraine with sunflower seeds unable to export global sunflower oil was partially disrupted. Palm oil prices were no longer constrained as the global total supply of plant oils decreased due to various issues. Whether the price of palm oil can climb again to the peak in the future, or gradually shift and start to fall also depends on whether the above factors have changed.

Firstly, we analyse the core drivers of the rise in palm oil price, the output situation in the main country and the demand for biodiesel in palm oil:?

Source: MPOB GAPKI, Nanhua Research

Based on Malaysian palm oil production over the last three years, a seasonal decline in palm oil production in the two major producing countries has been observed since 2021, and the magnitude of the decrease has been more pronounced, as a result of the combination of the aforementioned drought of 2019-2020 affecting palm fruit growth after 18 months. The decline in palm oil production in Malaysia is more pronounced than in Indonesia, where it has also been affected by the epidemic, which has prevented foreign workers from entering the country, and where the average proportion of foreign workers in palm gardens is over 50%, which has significantly affected palm fruit picking and the management of palm gardens, resulting in greater losses. The price of palm oil has seen an opportunity for speculation under a sharp reduction in supply in the main producer countries. And Indonesia's government's ongoing biodiesel policy in recent years has generated significant incremental growth on the consumer side, with palm oil prices rising amid supply reducing demand.

Looking ahead, on both the supply and demand side, firstly supply is beginning to recover steadily, with the decline in palm fruit yields levels due to weather in the early part of the year, and after the drought experienced in 2019-2020, two consecutive years of La Ni?a weather has brought abundant precipitation to the Western Pacific, with future palm fruit yields levels expected to recover and supply to increase marginally. On the consumer side, the Indonesian government's resolute confidence can be seen - using palm oil as biodiesel to reduce the country's dependence on traditional energy sources such as crude oil, to strengthen palm oil's voice in the global use of vegetable oils and greases, and to increase the financial value of palm oil. What is certain is that the incremental consumption of palm oil cannot be underestimated. Therefore, even if the international palm oil prices from the high price back down, but the bottom of the future palm oil prices are more difficult to return to the previous low level.

Source: My Agricultural Products Network I, Nanhua Research

There are also other factors contribute to price rise, such as the tight global supply of oilseeds, impediments to trade flows, such as food and resources, between countries as a result of the situation in Russia and Ukraine, and renewed trade protection have led to an uneven distribution of supply and demand, exacerbated supply problems and led to rising food crop prices.

Thus, it is expected that, first, trade protectionism is beginning to pick up as a result of the Russia Ukraine problem, supply chain and supply and demand distribution issues will have a long term impact on international food prices, and import costs for net importers of oils may remain high; second, for China, where imports of palm oil continue to be low for half a year and inventories remain low, subsequent demand for replenishment and incremental demand from resumption of production will support the prices of palm oil in the main producer; third, the increase in consumption of important oils from around the world is also on the biodiesel side, and the US, as the most important biodiesel advocate, is expected to increase its capacity expansion by more than 10% annually over the next five years. In 22/23, there is already a situation in which U.S. soybean oil has been squeezed on the industrial consumer side for consumption and exports, with the oil industry as the largest source of fuel to support prices. In the absence of a change in the biodiesel policy and high energy prices, investment ideas for palm oil will remain the same in the future.

There are also other factors contribute to price rise, such as the global oilseed supply appeared tight, the situation in Russia and Ukraine led to the emergence of food and resources between countries and trade flow links such as hindrance, trade protection re-emerged leading to uneven distribution of supply and demand, the supply problem was magnified, resulting in food crop prices continue to rise. ?

Therefore it can be expected that, firstly, due to the Russian-Ukrainian problem caused by trade protectionism began to rise, the supply chain and supply and demand distribution problems will long-term impact on international food prices, oil and grease net importing countries may continue to maintain high import costs. Secondly, its second for six months in a row palm oil imports and stocks continue to run at low levels in China, the subsequent demand for replenishment and resumption of work and production to bring the incremental demand for consumption will support the price of palm oil in the main producing countries. Thirdly, another important global oil and grease soybean oil consumption increment also in the biodiesel end, the United States as the most important biodiesel initiative, the growth rate of its capacity expansion in the next five years is expected to increase by more than 10% per year net.

In 22/23, the U.S. soybean oil consumed in industrial end has exceeded its food consumption and exports. Its industrial consumption has become the biggest support of the price. Under the situation that biodiesel policy does not change and energy prices remain high, the future investment advice of palm oil would be to buy large amount at low price.?