24/05/2008 (The Financial Express) - Palm oil futures in Malaysia may extend record gains this year as production slows and demand increases both for cooking and alternative fuel, said Dorab Mistry, director at Godrej International Ltd.

Prices may reach 4,500 ringgit ($1,397) a metric tonne as the peak output season ends in Indonesia and Malaysia, the biggest producers, starting September, Mistry said at a conference in Jakarta on Friday. “From September I expect the high production cycle to come to an end and palm fundamentals will tighten,” he said.

“The world is faced with competition for acreage between food grains, feed grains and oilseeds. We cannot escape higher prices.”

Palm oil and its main substitute soybean oil, mostly used in cooking, often move in tandem with crude as they can be converted into biofuels. About 90% of palm oil, which set a record in March, is cultivated in Indonesia and Malaysia. Oil surpassed $135 a barrel in New York on Thursday. Palm oil futures in Malaysia, the global benchmark, rose for a third week, gaining more than 2% to 3,644 ringgit a tonne at 5:43 pm. Prices of the world’s most consumed vegetable oil have risen 19% since January, reaching a record 4,486 ringgit a tonne on March 4, while crude has gained 38%.

Palm oil may stay at about $1,200 a tonne if crude prices hover around $120 a barrel, said James Fry, an analyst at LMC International Ltd in London. “If in six months’ time, there’s no change in crude oil, I would expect palm to be similar to or slightly below where it is today because it is supported ultimately by crude oil,” he said in an interview. “I don't see demand for biofuels disappearing because it is now a big industry.”

—Bloomberg