09/02/2010 (Bloomberg) - PALM oil advanced to the highest level in almost three years on concern that output in Malaysia, the world’s second-largest producer, may decline after adverse weather affected crops.

April-delivery futures on the Malaysia Derivatives Exchange climbed as much as 1 per cent to RM3,929 a metric ton, the highest since March 2008, and were at RM3,919 a ton at midday in Kuala Lumpur.

“The peak production period is off already, it’s finished, so it should be on the downward trend in terms of production numbers,” Hoe Lee Leng, an analyst at RHB Research Institute Sdn Bhd, said by phone today.

Prices of farm commodities such as palm oil and corn have jumped as demand threatens to outstrip supply because of lower yields from crops affected by a La Nina weather event. January and February are seasonally low production months for palm oil.
Production in December dropped 15.5 percent to 1.23 million tons from a month earlier to the lowest level in 10 months, while stockpiles were 1.61 million tons, the lowest since July, the Malaysian Palm Oil Board said on Jan. 10. The board will report January’s figures tomorrow.

Food commodities extended price gains last month after jumping in 2010 as drought and floods damaged crops from Russia to Argentina. World food prices rose to a record in January, the United Nations’ Food & Agriculture Organization said Feb. 3.

Prices of crude palm oil are expected “to come off in the second half, which is when normalized weather should come through,” Hoe said. Futures are set to surpass 4,000 ringgit, but will only remain there for a short while until weather conditions improve, she said.

La Nina, which started in June and usually lasts for nine months or more, has led to higher-than-average rainfall in most parts of Southeast Asia, hindering harvests in Indonesia and Malaysia, the top palm-oil producers. The weather event may weaken during the next four months, the Malaysian Meteorological Department said on Feb. 2, supporting forecasts by the World Meteorological Organization.

September-delivery palm oil on the Dalian Commodity Exchange rose as much as 1.9 per cent to 10,100 yuan ($1,534) a ton and was at 10,056 yuan at 11:12 a.m. local time. China’s markets were closed from Feb. 2 to Feb. 8 for the Lunar New Year holiday.

CME Group Inc.’s April palm-oil contract, pegged to the Malaysian benchmark price, rose 1.1 per cent to $1,272.75 a ton at 11:09 a.m. in Singapore. – Bloomberg