17/10/2007 (Bloomberg) - Indonesia, the world's largest palm oil grower, forecast that it will miss a target for output this year because of dry weather, exacerbating a shortage of the commodity that has helped drive the price to a record.

``Last year, our production was around 16 million tons and this year the prediction was 17, but because of weather conditions, it's going to end up about 16.8,'' Trade Minister Mari Pangestu said. Still, output this year is at a record.

Indonesia joins neighbor Malaysia in predicting that it will miss output targets for palm oil, which has gained 73 percent over the past year on increased demand. The two nations account for about 90 percent of global production of the commodity, used in foods, soaps and as an alternative fuel.

``The main concern is the supply,'' said Ben Santoso, an analyst at DBS Vickers Securities Indonesia. ``We don't think demand is going to slow down, which is why prices won't come off very much.''

Palm oil futures on the Malaysia Derivatives Exchange, which trades the benchmark contract, touched a record 2,814 ringgit ($830) a ton yesterday. The contract declined 0.2 percent to 2,762 ringgit at 12:14 p.m. local time today.

``Prices will not plummet or go up too high, but it's not going to come down from where we are now for too much,'' Pangetsu said in an interview yesterday. ``A lot depends on the price of oil itself, crude oil, fossil fuel, and that's at the moment relatively high.''

Crude Record

Palm oil prices often track crude oil prices, which also surged to a record yesterday. Crude oil for November delivery on the New York Mercantile Exchange touched a high of $88.20 a barrel, and the price has gained 48 percent in the past year.

The minister's figures tally with those from Derom Bangun, head of the Indonesian Palm Oil Association. Output this year would be 17 million tons, Bangun said Aug. 29, trimming an initial forecast made in May for output of 17.4 million tons. Bangun has forecast output of 18.4 million tons for 2008.

``We're obviously looking to expand production, not by clearing land, but finding land that is already cleared,'' Pangestu said.

Santoso at DBS Vickers Securities has forecast production of 16.6 million tons in Indonesia this year, rising 6 percent to 17.6 million tons in 2008. The price should average 2,500 ringgit a ton over 2007, he said. So far, it's averaged 2,301 ringgit, according to Bloomberg data.

`Increased Yield'

``We've been expecting all along that production will not increase all that much because of the drought,'' said Santoso. ``We're expecting increased yield and there's going to be some material hectarage coming online by next year.''

Indonesia, Southeast Asia's largest economy, was affected last year by drier-than-usual weather because of an El Nino, the periodic shift in global weather patterns that parches parts of Asia, disrupting agricultural production. The drier weather typically curbs output from oil palm estates the following year.

Palm oil output in Malaysia, the second-largest producer, may reach 15.7 million tons in 2007, 1.3 percent lower than the 15.9 million tons in 2006 and the first decline in nine years, Malaysia's Finance Ministry said Sept. 7 in a report. Sabri Ahmad, chairman of the Malaysian Palm Oil Board, said in August that palm oil output this year may total 16 million tons.