04/08/2011 (Bloomberg) - Palm oil advanced to its highest level in almost two weeks on speculation that demand for the tropical oil may increase as hot weather erodes conditions for the U.S. soybean crop.

The October-delivery contract climbed as much as 0.9 percent to 3,140 ringgit ($1,055) a metric ton on the Malaysia Derivatives Exchange, the highest since July 22. It ended the morning session at 3,137 ringgit.

Soybeans had the biggest gain in almost three weeks yesterday after a U.S. Department of Agriculture report showed the condition of the U.S. crop worsened last week amid continued hot, dry weather across the Midwest. About 60 percent of the soybean crop in the top 18 producing states was in good or excellent condition as of July 31, down from 62 percent a week earlier, the USDA said in an Aug. 1 report.

The forecast for smaller U.S. soybean output is making “palm oil more attractive,” Vijay Mehta, director at Commodity Links Pte, said by phone from Singapore today. “Palm oil has good demand at these prices, it’s still cheaper compared to soybean oil.”

Soybean oil’s premium over palm oil was at $215.57 a ton today, compared with an average of $142.44 a ton this year, according to Bloomberg data.

Weather Risks
Soybean futures declined as much as 0.3 percent to $13.75 a bushel today, after gaining 17.75 cents, or 1.3 percent, to $13.7975 a bushel yesterday, the biggest gain since July 13.

“There are still weather vagaries,” in the U.S., said Paramalingam Subramaniam, director of Kuala Lumpur-based brokerage Pelindung Bestari Sdn. “The full brunt of the U.S. weather will not be felt until the second half of August.”

This July was the hottest since 1955 in the central and eastern U.S. with average temperatures 3 degrees to 7 degrees Fahrenheit higher than normal, according to MDA Information Systems Inc. Corn and soybean output in the U.S., the world’s largest producer and exporter, will fall below government forecasts, INTL FCStone Inc., a commodity research and brokerage company, said yesterday.

High Temperatures
Grain and oilseed prices increased last month as hot, dry weather in the Midwest eroded crop prospects. The soybean harvest will fall to 3.145 billion bushels, less than the 3.225 billion forecast by the USDA, INTL FCStone said in a report. The yield will be 42.4 bushels an acre, below the government’s estimate of 43.4 bushels.

Soybean oil for December delivery fell as much as 0.8 percent to 57.40 cents per pound in Chicago. Palm oil and soybean oil are substitutes in food and fuel uses.

Palm oil for May delivery rose as much as 0.8 percent to 9,298 yuan ($1,444) a ton on the Dalian Commodity Exchange and soybean oil for delivery in the same month gained as much as 0.7 percent to 10,404 yuan a ton.