11/08/2010 (Bloomberg) - Palm oil was little changed after its discount to soybean oil narrowed, increasing the appeal of the rival oil for use in food and biofuels.

October-delivery futures ended the morning session at 2,672 ringgit ($845) a metric ton on the Malaysia Derivatives Exchange after declining as much as 0.7 percent earlier. The most-active contract lost 2.2 percent yesterday, the most since April 19.

Soybean oil’s premium over palm oil narrowed to $68.21 a ton on Aug. 9, the least in two months, according to Bloomberg data. It was $85.84 yesterday, compared with a 12-month average of $114.91. The vegetable oils are direct substitutes.

“We believe demand could shift to soybean oil as crude palm oil prices are expected to trade at meager discounts,” Hwang-DBS Vickers Research Sdn Bhd said today in a report.

December-delivery soybean oil fell 0.6 percent to 42.23 cents a pound yesterday on the Chicago Board of Trade.

Palm oil will average 2,363 ringgit a ton in the six months through December, 6 percent less than the 2,509 ringgit average so far this year before today, Ben Santoso, an analyst at DBS Vickers Securities (Singapore) Pte., said yesterday.

Prices will drop “significantly” in the fourth quarter as production from new trees in Indonesia, the top grower, exceeds estimates and buyers switch to soybean oil, he said.

“Crude palm oil is bullish in the near term but traders would be closely watching for the coming production season for leads,” Kenanga Investment Bank Bhd. said in a note today. “With crude palm oil production entering into seasonally positive months, inventory could be bottoming, thereby mitigating some of the bullishness.”

Weather Risk
Palm oil has rebounded 18 percent since dropping to the lowest price in almost eight months on July 7 on speculation that demand may increase in Asian nations and harvesting in Malaysia may be disrupted in November and December if the La Nina weather event causes flooding in major growing areas.

“If weather conditions do not deteriorate, vegetable oil prices would be vulnerable to a price setback,” Penny Yaw, an analyst at Citigroup Inc, said in a report yesterday. “We think the market could have also priced in weather risk premium into the prices of vegetable oils.”

On the Dalian Commodity Exchange, January-delivery palm oil added 0.2 percent to 7,100 yuan ($1,048) a ton and soybean oil for delivery in May gained 0.2 percent to 8,232 yuan.