24/02/2011 (Bloomberg) - Palm oil production in Malaysia, the second-biggest grower after Indonesia, may gain this year as an improvement in the weather after excessive rain aids yields, an industry group said, forecasting lower prices. Futures plunged.

Output may be 17.6 million metric tons compared with 17 million in 2010, Yusof Basiron, chief executive officer of the Malaysian Palm Oil Council, said in an interview. That would match production in 2009 and compare with 2008’s record of 17.7 million tons, according to data from the nation’s palm oil board.

Increased supplies and lower prices may help cool global food costs that reached a record in January according to the United Nations’ World Food Price Index. Palm oil has rallied 36 percent in the past year as floods hurt harvests in Indonesia and Malaysia. Soybeans, crushed to make a rival oil, have jumped 37 percent, tracking advances in wheat, corn and sugar.

“Palm goes into almost every food product, and if palm and associate oils like soy become expensive, it will impact food prices,” said Yusof, who’s worked in the industry for 32 years. If Malaysia can export more palm oil it will help ease shortages and prevent food costs from rising, he said yesterday. The council markets and promotes the oil, according to its website.

May-delivery futures slumped 4.2 percent to 3,514 ringgit ($1,151) per ton on the Malaysia Derivatives Exchange in Kuala Lumpur yesterday, the most since Nov. 22. The losses deepened today as the contract dropped as much as 3.3 percent to 3,397 ringgit, overturning an earlier gain.

Malaysia’s Plantation Industries and Commodities Minister Bernard Dompok told reporters today that palm oil exports may be better this year than in 2010. The country intends to boost palm oil yields and accelerate replanting, Dompok said.

‘Rain is Plentiful’

“Rain is plentiful, not enough to cause floods, but enough to induce growth and vigor in the production processes of oil palms,” Yusof said. “We could expect normalization of production back to what it should be from March.”

Production in January declined 14.2 percent from a month earlier to 1.06 million tons, the lowest level since February 2007, according to the Malaysian Palm Oil Board. Stockpiles shrank to 1.4 million tons, the smallest amount since July.

A La Nina weather event, which can bring excessive rain to Southeast Asia and drier-than-usual conditions to parts of Latin America, including the soybean- and corn-growing areas in Argentina and Brazil, is showing signs of weakening, according to the Australian Bureau of Meteorology.

Malaysia’s palm oil reserves will be replenished by the second half of 2011 as yields improve, leading to a softening in prices, said Yusof. Crude palm oil may average 3,500 ringgit a ton this year, he said. Futures had reached a 35-month high of 3,967 ringgit a ton on Feb. 10.

Yusof joins ECM Libra Capital Sdn. and Credit Suisse Group AG in forecasting a drop in palm oil prices as the effects of the La Nina taper off. Palm oil may be close to peaking, Credit Suisse said in a report on Feb. 17.