29/06/2011 (Borneo Post) - The changes in global monetary policies, government monetary policies, weather anomalies and the price direction of competing oils will be key to new price discovery for crude palm oil (CPO) in the second half of 2011 (2H11).

Maybank Investment Bank Bhd (Maybank IB) expected CPO prices to drift towards RM3,000 per tonne in 2H11on the back of strong production recovery in April and May 2011. “CPO will be a price taker in anticipation of ample supply in 2H,” said its senior analyst Ong Chee Ting in a research note.

Oil World projected global inventory of oils and fats to remain tight during the 2010/11 forecast (10/11F) and 11/12F forecast production seasons. In its June 2011 issue, it forecasted the global stock usage ratio for 17 oils and fats for 11/12F at 11.1 per cent versus an average of 11.7 per cent.

In Malaysia, May’s CPO production was 1.74 million tonnes, the highest ever recorded for any 1H period and the second monthly highest in Malaysian history. “We believe Malaysian Palm Oil Board will likely revise upwards its 2011 full year production forecast from 17.4 million tonnes to between 18 million and 18.5 million tonnes,” said Ong.

He further said the world began its big push for the promotion of renewable energy in recent years due to climate change. As corn oil, soy oil and CPO could be converted into biofuels, their prices had become positively correlated to crude oil prices. “Our in-house economist expects the price of crude oil to remain lofty in 2011/12 at around US$100 and US$105 per barrel.”

Following the end of La Nina events which resulted in excessive rainfall to most parts of Malaysia in the first quarter, the recent Southern Oscillation Index reading by the Australian Bureau of Meteorology had indicated neutral values.

This was further supported by the European Centre for Medium-Range Weather Forecast which predicted normal rainfall patterns in the 3Q for most parts of palm oil producing regions in Malaysia and Indonesia. “However, should Mother Nature change her weather pattern, CPO prices will be in for another wild ride,” said the analyst.

On other other hand, global speculative activities were reaching new highs following the US Federal Reserve’s infusion of massive liquidity into the global financial system via QE and QE2 measures, resulting in suppressed borrowing rates. This had led to cheap money chasing up prices of alternative assets.

“While the Fed has indicated there will be no QE3, it remains uncertain whether the FED will introduce other measures to stimulate the US economy as recent economic data out of US remains uninspring,” said Ong. “Hence, our economist is rulling out an immediate tightening of monetary policies in the US and this means that commodity prices will continue to remain high in 2H11.”

On the economy front, the government policies were also viewed as an important tools to kick-start and manage initiatives. “More often than not, new initiatives entail government incentive or subsidies.”

Few years back, the US government provided huge subsidies to kick start its biofuel initiatives. While beneficial to the local farmers, it was criticised by the World Bank and other international organisations because of concerns they were driving up food prices.

The ethanol subsidies were said to cost US taxpayers US$6 billion a year. Corn is the biggest crop in the US, valued at US$66.7 billion in 2010. Depending on the final proposed reduction in subsidies, it could have obvious impact on corn and soybean prices as well as indirectly on CPO prices.

“As corn is much more profitable at this juncture, farmers will favour corn to soybean planting. While US planting season for corn is almost over, if such ratio persists till Southern Hemisphere planting season in September 2011, we shall see higher percentage of corn planting there. This will result in lower soybean output and boost the price of CPO,” Ong stressed.

However, he pointed out that should the ethanol subsidies be completely removed or gradually reduced, the soybean/corn price ratio could reserve and lessen the pressure on soybean’s looming shortage.

Over the long run, the research firm believed the CPO price would trend towards a more sustainable price forecast of RM2,500 per tonne. “Although this would still be significantly above its long term historical price of RM1,500 per tonne, the new sustainable price is justified by few factors.

“The factors are the structural change in demand due to non-edible use, climate change that has led to unpredictable and extreme weather patterns in major crop production nations, rising affluence in China and India as well as the rising production costs,” he added.

With all of these factors in hand, plantation or plantation-related sectors is currently at the crossroads awaiting for fresh leads, possibly from the US soybean planting progress, the US monetary policy, changes in government policies and unexpected change in weather patterns.