10/03/2011 (Financial Times) - Crude palm oil prices were down slightly in Kuala Lumpur on Wednesday, but that didn’t stop many of the experts at the annual Bursa Malaysia palm oil conference predicting near record prices by the end of the year.

Several top speakers forecast that CPO prices would hit M$4,000 by the final quarter of 2011, compared with a little under M$3,600 in KL in mid-afternoon, propelled by a combination of rising demand, production shortfalls and crude oil prices.
“I expect a strong recovery in crude palm oil prices from August which could once again trade in the M$3,600 to M$4,000,” said Dorab Mistry, analyst at London-based Godrej International, according to Reuters.

However, there was also a strong feeling that the market could turn out to be pretty volatile over the next few months, in part because the small but growing demand for palm oil as a feedstock for biodiesel can be switched on and off quite quickly in response to movements in the crude oil price.

James Fry, chairman of LMC International, the UK-based agribusiness consultancy, said CPO prices could go above M$4,000 within a few months, but tumble back to as low as M$2,255 as demand dried up.

Pricing concerns are relative, though. At M$3,557 in KL the price of CPO was well below the levels of around M$3,750 that it was trading at a few weeks ago. However, the current price is more than double than the long term average of about M$1,500 a tonne. At these levels, the plantation groups are making at least M$2,000 a tonne more than their costs of production.

That is translating into a big surge in profits. Singapore listed Golden Agri-Resources, Indonesia’s biggest palm oil producer, has just announced a 147 per cent rise in net profit to US$1.4bn for 2010, despite being blacklisted last year by Unilever, Nestlé and Kraft Foods, the consumer products groups, following Greenpeace claims that it destroyed rainforest areas to plant oil palm trees. (It denies the claims.)

And Sime Darby, a Malaysian conglomerate that is the world’s biggest listed producer, recently disclosed a 104 per cent increase in second quarter net profit to M$877m, driven mainly by its palm oil operations.

Production is currently rising, following depressed output as a result of weather events last year. But international supply is likely to remain tight as Malaysia fails to keep up with demand and Indonesia keeps more oil at home to satisfy domestic demand. Malaysia and Indonesia are the world’s two suppliers of palm oil.

Biofuel is also helping to raise long-term demand, even though it can lead to short-term volatility. Less than 10 per cent of palm production is currently used for fuel, but the link to crude oil helps to put a floor under palm prices, as does its role as a replacement for other vegetable oils, such as rapeseed, which are in greater demand.

Analysts say long term demand is likely to rise consistently, driven mainly by the increasing use of edible oils in India and China, where prosperity is triggering dietary changes that are raising demand for processed foods. Many of these contain palm oil, including pastries, chocolate and ice-cream.