20/02/2008 (The Star Online), Petaling Jaya - Crude palm oil (CPO) inventory hit a record last month while the commodity's futures contract climbed to a fresh peak of RM3,625 per tonne yesterday.

Malaysian Palm Oil Board last week announced that palm oil stockpiles in January surged 11.5% to a new high of 1.88 million tonnes from 1.68 million tonnes in December.

Theoretically, any rise in inventory should lead to a drop in the price, as that is a sign of oversupply. The surging CPO prices, however, suggest the latest stockpile numbers do not worry the commodity bulls at all.

The market has shrugged off concerns of high stockpiles of CPO because several factors have pointed to solid prices for edible oils, including CPO.

“It (the market) is looking ahead to 2008 when demand for vegetable oils is expected to outstrip supply,” said Credit Suisse in a report last Thursday.

It noted that the stock-over-use ratio for global vegetable oils and fats was expected to be at record lows due mainly to the “fight for acreage” between oilseeds and grains.

The US Department of Agriculture predicted that its wheat inventories this year would fall to its lowest level since 1947. Credit Suisse sees the “fight for acreage” intensifying this year.

Unlike palm trees, soybean, rapeseed and wheat are annual crops. American farmers would normally shift to crops that command better prices. The additional supply would then adjust the prices downward.

However, it is different this time around. As prices of both oilseeds and grains are equally strong, it may be hard to tell which crops the farmers prefer.

Furthermore, the severe snowstorm in China, one of the world's biggest edible oil consumers, has destroyed almost half the total area planted with rapeseed. The country may have to import more soybean and edible oil, including CPO.

Analysts said the crop damage in China would cause a shortage of edible oils, which would push up prices.

Also, OSK Research said the market had not fully discounted the potential supply shortfall this year from Indonesia's drought-impacted production yield.

Soybean and soyoil prices are also breaking new records. Soybean for May delivery rose 1.4% to a high of US$14.1075 per bushel while soyoil increased nearly 2% to 60.3 US cents a pound.

Nonetheless, having seen the sharp rise in CPO price over the past two years or so, some quarters have turned sceptical on the upside potential of the commodity.

Against the backdrop of an economic downturn in the US, there is growing concern that the demand for commodities, including edible oils, will soon shrink, thus causing an excess of supply.

Aseambankers issued a note last week to warn its clients that “commodity prices could peak soon.”

It said when worries over the health of the US and world economy led to a sell-down in global equities, that would in turn put off speculative buying in the commodity market.

Commodities, including vegetable oils, are seen as a good hedge against the weakening US dollar. It is said that some investment money has flocked to the commodity markets, inflating the price bubble.

“Palm oil, with ample supply as it progresses towards seasonally higher production months in the second half of this year, could suffer a significant price correction,” Aseambankers added.