10/03/2010 (Bloomberg) - Palm oil demand will expand faster than output this year as El Nino curbs supply and Asian consumption expands, TransGraph Consulting Pvt. said.

Global demand will rise 6.2 percent to 46.8 million metric tons in the year ending Sept. 30, from 44.1 million tons a year earlier, said Nagaraj Meda, managing director at Hyderabad-based TransGraph, which says it advises commodity suppliers and buyers including Bunge Ltd.’s India unit. Output will rise 5.9 percent to 47.4 million tons, he said.

“From 2011-2012, we’re going to see a shortage because the incremental demand will be more than the exportable surplus,” Meda, a commodities researcher for 11 years, said in an interview in Kuala Lumpur yesterday, without citing volumes.

Tighter palm oil supplies may help extend a 57 percent price gain in prices last year as demand expanded from China and India, the world’s largest consumers and importers. About 82 percent of palm oil demand was met by imports last year, according to data from the U.S. Department of Agriculture.

El Nino may drive prices as much as 22 percent higher than the March 8 close to 3,300 ringgit ($988) a ton in the first half, Anne Frick, vice president for research at New York-based commodities broker Prudential Bache Commodities LLC said in an interview on March 8. The commodity may touch 3,200 ringgit in the second half, Godrej Director Dorab Mistry told a conference in Kuala Lumpur yesterday.

“El Nino and a lean supply season will weigh on palm oil supplies until May 2010” when prices may peak at 3,000 ringgit a ton, Meda said yesterday.

El Nino
The El Nino weather phenomenon is characterized by the warming of sea-surface temperatures along the equatorial Pacific Ocean and can reduce rainfall in parts of Asia, damaging crops including palm oil, rice, corn and sugarcane.

Palm oil output in Malaysia, the world’s second-largest producer, will be about 17.2 million tons this year, Mistry said, because the effect of El Nino will coincide with a government replanting program and a low output period in Malaysia’s production cycle. That’s lower than the record 17.8 million tons forecast by the country’s Finance Ministry in October,.

Plantation Industries and Commodities Minister Bernard Dompok said yesterday the nation’s production would be 18.1 million tons. Dompok said last July that 2010 output may drop as much as 16 percent because of El Nino.

Still, investors may switch away from commodities including palm oil and crude oil after May as central banks raise interest rates, boosting demand for government securities and pushing the Dollar Index to as high as 85, Meda said. The index, which gauges the strength of the dollar against six major counterparts, was little changed at 80.59 at 9:13 a.m. Singapore time. It last climbed to 85 in April last year.

A stronger dollar may push crude oil prices to as low as $65 a barrel, curbing demand for biodiesel, he said. Crude oil for April delivery dropped for a second day today, losing 0.4 percent to $81.20 a barrel in New York.