07/03/2011 (Bloomberg) - Palm oil demand will grow this year, outpacing supplies, even as production in Southeast Asia may improve from the second quarter onwards on better weather conditions, TransGraph Consulting Pvt. said.

Global demand may rise 5 percent to 48.9 million metric tons in 2011, from 46.6 million tons last year, the Hyderabad- based company said in a report released today. Output is forecast to increase 4.2 percent to 47.8 million tons.

“Demand from China and India continues to be strong throughout the year and overall annual demand shall outpace supplies, eating into the stocks for a second consecutive year,” the report said. Inventories are forecast to drop 28 percent to 2.86 million tons in 2011, compared with 3.97 million tons last year, the report said.

World food prices have surged as droughts, heavy rains and floods hurt crop-growing nations, affecting production and depleting stockpiles of grains and cooking oils. The La Nina weather event, which brought heavier-than-usual rainfall to parts of Southeast Asia, continues to weaken, the Australian Bureau of Meteorology reported on March 2. Subsiding severe weather patterns will bring respite to plantations in the region, TransGraph said.

China’s dependency on imported oilseeds and cooking oils will remain strong in the coming months as drought and reduced acreage lowers its rapeseed harvest, the report said. Indian purchases of oilseeds will increase after June, when domestic crushing slows, the report said.

Prices Peaked
Prices of vegetable oils have peaked and are expected to consolidate and decline, Murali Krishna P.V., chief executive officer of TransGraph, said in an interview on March 4.

Palm oil will average between 3,300 and 3,400 ringgit ($1,123) a ton for the next three to four months, and will drop to about 2,900 ringgit in that period because of improving weather conditions and a better outlook for soybean crops and supplies, he said.

There will be an overall increase in plantings of soybeans and corn “due to tight grain and oilseed balance sheets,” TransGraph said in the report. “Between soy and corn, we bet more on corn due to its multi-year stock, encouraging revenues, strong demand for bioethanol, and there shall be marginal additions, if any, to soybean crop areas.”

Soybean futures may trade between $11.50 to $14.25 a bushel in the next three to four months, while soybean oil may be between 43 cents to 59.5 cents a pound. Palm and soybean oils are substitutes in food and fuel uses, and prices can be influenced by shifts in energy costs.

Crude Gains
Rising crude oil prices prompted by unrest in the Middle East have increased the appeal of vegetable oils used in biofuels. Crude in New York increased 0.7 percent to $105.12 a barrel at 9 a.m. in Singapore, a 29-month high.

“We see that if crude oil consistently trades above the $100 mark, it could offset the weak impact emanating from improving weather, driving the prices back to bullish tones,” the report said. “With weather and biodiesel demand being the major trump cards, any supply disruptions during the next season would fuel edible oil markets.”

Palm oil futures on the Malaysia Derivatives Exchanges have averaged 3,737 ringgit this year, and closed at 3,660 ringgit on March 4. The contract rose 4.1 percent last week.

World food prices climbed to a record in February, the eighth straight monthly gain, on surging dairy, grain and meat costs, the United Nations’ Food & Agriculture Organization said on its website on March 3.