19/09/2011 (Bloomberg) -- Palm oil may rally next year as demand for biofuels cuts soybean oil supply and a potential reversal in monetary policy in China and India boosts demand, according to Dorab Mistry, director of Godrej International Ltd.

Prices in Malaysia will see a gradual recovery after November to reach 4,000 ringgit ($1,296) a metric ton by the second quarter of 2012, Mistry said, maintaining a forecast he made on July 28. Futures may “bottom out” at about 2,800 ringgit a ton this month, he said. The commodity last traded below 2,800 ringgit in October 2010 and ended at 3,078 ringgit yesterday. The market is closed today.

“Both China and India have been raising interest rates and tightening money supply in order to fight food inflation in their domestic markets, and yet we have seen these high prices,” Mistry told a conference organized by Goldman Sachs Group Inc. in Singapore today, according to an advance copy of his remarks. “What will happen when the central banks of China and India take a more normal approach and let interest rates fall? That is why I remain optimistic about prices of grains, oilseeds and vegetable oil for 2012.”

China has raised interest rates five times over the past year and India today increased rates for 12th time since the start of 2010 to control inflation partly blamed on food costs. World food prices probably will stay at historically high levels this year after falling in August on lower costs for cooking oils and dairy products, the United Nations said Sept. 8.

‘Good Shape'

Chinese Premier Wen Jiabao said on Sept. 14 the nation's economy is “generally in good shape” and that inflation is generally controllable. China will continue proactive fiscal policy and prudent monetary policy, he said at the World Economic Forum meetings in the Chinese city of Dalian.

India and China are the world's biggest palm oil users.

A slowing expansion of oil-palm plantations in Indonesia, the biggest producer, because of European Union rules and efforts by non-governmental groups is a reason for his “bullish” outlook, said Mistry, who's traded the cooking oil for more than three decades. He correctly predicted that prices would climb to more than 3,000 ringgit last year.

Palm oil on the Malaysia Derivatives Exchange has lost 22 percent since reaching a 35-month high of 3,967 ringgit a ton in February on concern that output will expand this year. Malaysian output may gain 2 million tons to 19 million tons in 2011, while Indonesian production may rise 3 million tons to 25.5 million tons, Mistry said July 28.

Biodiesel Popularity

Sime Darby Bhd., the world's biggest listed producer, expects palm oil to remain at about 3,000 ringgit for the rest of this year on good demand, Franki Anthony, the company's plantation managing director, said on July 22.

Rising popularity of biodiesel made from soybean oil and its expanding mandate in Brazil and Argentina will reduce its availability for export from these two countries, Mistry said.

The new “normal” price for soybeans will be $11 to $15 a bushel, he said. Palm oil competes with soybean oil for use in foods and fuels.

Soybeans for November delivery on the Chicago Board of Trade gained 0.7 percent to $13.6825 a bushel by 3:06 p.m. in Singapore today. The most-active contract has gained 32 percent in the past year.

Global soybean inventories before the 2012 harvest will reach 62.55 million tons, compared with 60.95 million estimated in August and 68.82 million this year, the U.S. Department of Agriculture said Sept. 12. Farmers in the U.S., the world's biggest grower and exporter, will harvest 3.085 billion bushels this year, above the 3.032 billion expected in a Bloomberg News survey and up from 3.056 billion estimated in August.

“The jury is still out on North American crops but the indifferent weather gave us a premature bull market in grains and oilseeds, despite ample production everywhere else,” Mistry said. While the weak macro-economic outlook for Europe and the U.S. will keep a lid on commodity prices in the immediate future, “for 2012, one has to be bullish unless the developed world gets sucked into a double-dip recession.”