14/04/2008 (The Edge Daily), Kuala Lumpur - Prices of commodities appear to have been caught up in the upward draught of palm oil and soybean oil prices.

The draught is fuelled by rising oil prices. When crude oil rose to an all-time high of US$112.21 (RM359) in New York last Thursday, palm oil futures for June delivery gained as much as RM130 to RM3,455 on Bursa Malaysia Derivatives.

A steady gain in crude oil would kick in the demand for biodiesel, which explained the recent upturn in palm oil prices, an analyst said. “The price behaviour of CPO has changed, and we are in a situation where there is an increasing correlation in the commodities than before.”

With the influence of energy prices coming into play, London-based research and consultancy LMC International managing director Dr James Fry said early last year that the CPO price behaviour had changed forever., adding that the energy price influence would not vanish.

The prices of soybean, corn and wheat are near historic highs. Soybean oil for May delivery gained 2.4% to US$13.62 a bushel in overnight trading.

While the drop in palm oil stockpiles partly drove CPO prices up, analysts concurred that excessive hedging in the futures market was to blame for market volatility.

“The volatility and sharp corrections in CPO prices happened because of the investment funds in the market hedging against the weakening US dollar. Also, losses in the equity markets have led to funds seeking higher returns in commodities,” said an analyst with a local brokerage.

At the close last Friday, palm oil futures for the benchmark June fell RM1 to RM3,454. May delivery added RM15 to RM3,450 while July delivery closed RM20 higher to RM3,470.

The uptrend for CPO and soybean oil is set to remain firm.

At the same time, the demand for rice, a staple food for almost half of the world’s population, is rising, driving up inflation in some nations, and even resulted in a food crisis in the Philippines. The price of rice has risen by as much as 70% during the past year and is approaching US$1,000 (RM3,200) a tonne.

Several factors are driving the price of rice including rising affluence in India and China with drought and other bad weather reducing output. Many rice farmers are turning to more lucrative cash crops while urbanisation and industrialisation are reducing planted land.

Standard Chartered Bank economist Alvin Liew said: “The higher cost of food has been one of the main reasons for higher inflation broadly across Asia, the other being higher fuel prices.

“Given the relative importance of food within the Malaysian consumer price index (CPI) basket where food and non-alcoholic beverage comprise 31.4%, we believe that Malaysia will still be impacted by rising food prices going into second quarter of 2008, although the impact could be cushioned initially by a myriad of government subsidies.”

“Whilst we could yet see benign inflation in 1H08, inflationary pressure should continue to build up into 2H08 as the high prices of global soft commodities would increasingly exert a material impact on Malaysian prices,” Liew told The Edge Financial Daily recently.