2013 Price Forecast by Dorab Mistry at Bali Conference (29-30 November 2012)

Palm oil may trade in a range in the next three months before

slumping into a bear market as global production peaks in the

second half of next year, according to Dorab Mistry, director at

Godrej International Ltd.

Futures on the Malaysia Derivatives Exchange will trade between 2,300 ringgit ($755) and 2,600 ringgit a metric ton until February, keeping inventories high in Indonesia and Malaysia, the top producers, Mistry told a conference in Bali, Indonesia today. Prices will drop below 2,200 ringgit in August or earlier as a pickup in output expands inventories, he said.

Palm oil, used in everything from biofuels to candy and noodles, has slumped 25 percent this year as slowdowns in China and the European Union curbed demand, pushing inventories to a record in Malaysia. Mistry’s forecast contrasts with the outlook from Rabobank International, which picked palm oil to be the best-performing agricultural commodity in 2013. Futures, which fell to a three-year low of 2,220 ringgit on Nov. 12, will drop if India, the largest buyer, raises import taxes, Mistry said.

“From March onwards, the recovery in soft oil production and the anticipation of big crops to be harvested will prevent any thoughts of a price rally,” said Mistry, who in June, correctly forecast a slump in palm oil. “I expect vegetable oil prices to remain range-bound in the first half of the year and to begin a major bear market in the second half.” Soybean, sunflower and rapeseed oils are usually referred to as soft oils.

Monthly Records

Palm oil output in Indonesia and Malaysia may reach monthly records between September to December next year, said Mistry. Malaysia may produce at least 19 million tons in 2013, while Indonesian output may reach as much as 30 million tons, he said. Production is forecast at 18.4 million tons and 27.5 million tons respectively this year, he said.

The contract for delivery in February fell 0.3 percent to 2,386 ringgit a ton in Kuala Lumpur yesterday. Futures are set to drop 4.4 percent this month. A bear market is typically defined as a decline of more than 20 percent. Most-active palm oil last traded below 2,200 ringgit in November 2009.

Palm oil may be the best-performing agricultural commodity next year as demand rebounds after this year’s price plunge, Rabobank said Nov. 28. Prices are expected to rise as inventories decline from record levels and demand increases from importers including China and India, the bank said.

Global food use of vegetable oils may grow by about 3.5 million tons as lower prices stimulate consumption, while biodiesel usage will expand 500,000 tons in the year that began on Oct. 1, said Mistry, who’s worked in the industry for 35 years. The increase in demand of 4 million tons will exceed incremental supply of 3.15 million tons, he said.

‘Heaviest Stocks’

The new season is starting with the “heaviest stocks in history” and this overhang will cushion the impact of the lower production of vegetable oils in the first half, said Mistry. Malaysia’s reserves climbed to a record of 2.51 million tons in October, according to the nation’s palm oil board. Stockpiles in Indonesia may be 3.5 million to 4 million tons, compared with the normal so-called guesstimate of 1.5 million to 2 million tons, Mistry said in September.

India, the biggest buyer of palm oil, started its new oil year with record inventories of 1.65 million tons, said Mistry. Domestic cooking oil output should expand this year due to a bigger mustard crop, he said. That may prompt the government to impose a 10 percent duty on crude palm oil imports and more than double taxes on refined oils to 20 percent, he said.

While the ratio of U.S. corn to soybeans prices is currently in favor of corn for the new crop, a switch to corn isn’t expected due to the need for a crop rotation, said Mistry.

Soya-Complex

“I am bearish on the soya complex post-May with a gradual erosion of risk premium from as early as February,” he said. “Old crop soya oil needs to control demand and will therefore remain at a big premium to palm.”

Soybean oil futures in Chicago may trade in a range of 48 cents and 53 cents a pound, while the new soybean oil crop from May onwards should see prices between $900 and $1,020 a ton on a free-on-board basis in Argentina, he said. Soybean oil for delivery in January traded at 50.05 cents today.

Production of sunflower oil may be about 1 million tons lower in 2012-2013 as crops in Russia and Ukraine decline, Mistry said. Supplies of rapeseed oil in the next few months will be tight on a smaller canola crop and the biggest effect of more expensive rapeseed oil will be felt in the U.S., where canola oil has been replacing soybean oil for food, he said.

“Some of that demand may be inelastic and some of that demand may go back to soya oil,” he said. “It will also create space for more palm oil to be imported into the U.S. in 2013.”

Global economic growth is expected to be better in 2013, compared with this year, with the U.S. avoiding or resolving the so-called fiscal cliff, leading to a stronger dollar and gains for equities in most markets, said Mistry.

“The end of the cyclical bull market in commodities leads me to believe that profitability in agriculture and in plantations will soon revert to more normal levels,” he said. “The days of super-normal profits in palm oil cultivation are coming to a close.”          [Bloomberg]