In the third quarter of 2009, CPO prices averaged US$604/metric ton (MT), 9 percent lower than the Q2 average of $665/MT on the back of a six-month high reserve in Malaysia as production climbed to the highest level in 2009 at 1.49 million MT while August exports dropped 9.5 percent month-to-month to 1.32 million MT.
Entering the fourth quarter, there is an upward movement in the CPO price, averaging $600/MT in the first 14 days of Q4, mostly supported by the surge in oil price movements and weakening in the US dollar relative to other currencies.
However, this positive trend in the remaining part of Q4 is likely to be limited by the seasonality caused by the harvesting period. This has been seen in September's CPO production in Malaysia which grew 4.1 percent m-m with stock levels up 11.5 percent m-m to 1.58 million MT on the back of flat exports during the month.
Nevertheless, we expect CPO prices to perform better as we enter Q1 of 2010.
Several supporting factors are indicative of a strengthening of El Nino effects during winter in the northern hemisphere and this is most likely to peak at moderate strength, according to the National Oceanic and Atmospheric Administration (NOAA).
Even a moderate El Nino effect might impact negatively upon production of palm oil by around 5 to 10 percent according to industry sources.
This coupled with possible production decline due to normal seasonal factors in the first half of 2010 is likely to restrict supply of CPO.
From the demand side, support will come as India plans to continue importing CPO due to drought that has severely damaged its domestic edible oil crops.
Continuing economic recovery in the emerging markets like China and slowing contraction in the most advanced countries like the US and Japan will also help to boost demand for CPO.
Our discussion with a plantation company revealed an interesting development within the industry.
Contrary to the conditions in the last two years, whereby seed purchases for expansion would require waiting lists, current seeds demand is now depressed due to cash conservation by many plantation companies.
In fact, it is now possible to buy plenty of three-month-to-one-year old seeds that are ready to be planted without having to put the seeds in nurseries in the first year.
This translates into lower risks of failed seeds for plantation companies.
London Sumatra and Sampoerna Agro only sold 1.8 million seeds (-82 percent year-on-year) and 2.6 million seeds (-71 percent y-y) compared with last year when the two companies were able to sell 17.9 million and 18.4 million seeds respectively.
In our view, a slow down in new planting will decelerate production growth of CPO in the next three years.
Furthermore, a lower CPO price from its peak in the first half of 2008 has also forced plantation companies to reduce fertilizer applications on immature and mature estates, which eventually would also slow production growth.
A USDA report reveals that expected 2010 ending stocks will decline 12 percent y-y as production grows 5.4 percent, lower than the consumption growth rate of 5.9 percent.
Currently, our CPO price assumption is at $600/MT in 2009 (year-to-date average of $595/MT), rising to $700/MT in 2010 due to the above-mentioned issues, although there is some risk to our call in the form of strong soybean production in the US and Latin America on greater farm planting, with more area under cultivation.
However, at this stage of the cycle, we believe the positives continue to outweigh the negative factors within the Indonesian plantation sector.
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