04/10/2008 (The Financial Express) - Ballooning vegetable oil stocks and a fast-declining interest from funds in volatile commodities may hold off a recovery in palm oil prices until 2009, despite its fall to a level much lower than rival soyoil.

Palm oil’s discount to soy oil has more than doubled to $450 a tonne in just six months as palm lost half its value since hitting a historic high in March, triggering market gossip that palm might have gone too low too soon and would bounce back.

But analysts said that rising output in Malaysia and Indonesia and bumper crop in China and India would boost supplies and reduce export demand. And with a worsening financial crisis, funds are fleeing assets that have seen wide price swings recently.

“Panic has forced funds and investors to sell out palm oil,” said Martin Bek-Nielson, executive director, United Plantations Bhd. “Cash is now king in an environment when stocks are ballooning, exports are dwindling and the global economy is getting shattered.”

The rising use of soyoil to make biodiesel in the US and concerns over production in Latin America could help soy oil, which is down about 13% in 2008, to claw back some gains to 45 cents - 48 cents a pound in coming months. But palm oil would hover in the 2,000 ringgit -2,400 ringgit ($576 to $691)-a tonne range until the second quarter of 2009, when the lean production season starts.Palm oil, used as a cook ing medium and in products from cosmetics to biofuels, has lost 55% since hitting an all-time-high of 4,486 ringgit on March 4.

More recently, palm sales have suffered because of defaults. Sliding palm oil prices have hit shares of Southeast Asia's plantation industry, once most sought after by investors.

Sector bellwethers such as Malaysia's IOI Corp have dived about 47% ever since palm oil prices fell from record highs. Astra Agro Lestari Tbk, Indonesia largest listed planter, has slumped 60%, while Singapore-listed Wilmar International has tumbled almost 40%.

Indonesia and Malaysia, which together account for the bulk of global palm oil production, are expected to produce around 38 million tonne of the commodity in 2008, around 8%-10% higher than earlier estimates, analysts said.

—Reuters