KUALA LUMPUR: Crude palm oil (CPO) prices took a major tumble yesterday, following the knock-on effect from falling soybean oil prices. Soybean oil prices on the Chicago Board of Trade (CBOT) have fallen for three consecutive days following news of improved crop prospects in South America.

CPO and soybean oil are rival edible oils and their prices move in tandem.

Bursa Malaysia Derivatives’ CPO futures for three-month forward delivery in May fell RM140, or 3.6%, to end at RM3,745 a tonne yesterday, from Monday’s close of RM3,885 a tonne.

The contract had opened the day RM70 lower at RM3,815 a tonne. It later touched a high of RM3,822 a tonne only to fall to a low of RM3,741 during the day before closing at RM3,745 a tonne.

The three-month forward contract had traded to a high of RM3,930 a tonne this year — the highest since the commodity rally in March 2008.  

Last year, the three-month forward contract’s lowest price was RM2,250 a tonne on July 7.

The contract reached its highest ever at RM4,466 a tonne on March 4, 2008, before crashing to a low of RM1,331 a tonne on Oct 28 the same year, after the global financial crisis hit.

One futures trader said the CPO price tumble yesterday was a knock-on effect from falling soybean and soybean oil prices, which fell sharply this week.

The closure of the exchange on Tuesday for a public holiday may have aggravated the fall, as CPO prices reacted — in one day — to two days of sharp falls for soybean oil.

Asked if the market could expect CPO prices to continue spiralling down, the trader said, “We should not see the same [pace of] tumbling if the crops prices stay stable. I don’t think we will have a sharp fall today unless something happens in the soybean market.”

A plantation analyst said CPO prices are close to peaking although it is difficult to pin-point the price and time they will peak at.

“Barring weather circumstances, we might see CPO prices trending down at the end of 1Q or early 2Q. We expect supply to improve in the second half of the year.

“And there is a lack of catalysts for investors to be excited about. Everyone has heard of the RM3,800 a tonne level, so it is nothing new for investors. The market needs really bullish news in order for interest to pick up again,” he said.

Credit Suisse said in a report last week that CPO prices could not be sustained as speculative positions in soy, corn and palm are at record highs and CPO futures are vulnerable to profit-taking due to high foreign participation.

“We believe the current palm oil rally could be closer to its end. During the commodity rally of 2008, palm oil prices remained above RM4,000 for just two days. Palm oil prices at such a high level could result in a slowdown in demand as affordability in poorer countries would be affected adversely,” said Credit Suisse.

US soybean and soybean oil futures tumbled on Tuesday as traders decided to reduce risk exposure following reports of improved South American crop prospects.

On Tuesday, CBOT March soybean futures, the most active contract, were down 34¾ US cents or 2.5% at US$13.68 (RM41.72) a bushel. March soybean oil futures fell 1.15 US cents or 2% to 56.48 US cents a pound.

“With record projected Brazilian crops doing well and Argentina receiving beneficial rains, South American crops are looking bigger,” Joe Victor, a business development specialist with the Minneapolis Grain Exchange, was quoted as saying in a Dow Jones report.

Brazil and Argentina are the second and the third largest producers of soybeans behind the US, and are expected to relieve the strain on US supplies in the spring.

However, some analysts caution that it may be too early to turn bearish on palm oil or soybean oil, as supplies are still presently tight.

The US Department of Agriculture estimates US soybean carryover for the 2011 marketing year at 140 million bushels, down 11 million bushels, or 7%, from 151 million bushels a year earlier.

An Iowa State University report on Feb 15 said that supplies for the current marketing year imply that US carryover stocks in terms of number of weeks’ of supply may be the lowest on record. It said that this summer’s US soybean supplies are likely to be even tighter than the low points in the early 1970s and mid-1990s. The tight supplies are due to weather problems and the expanding demand for biofuels.

The report noted that this season’s expected growth in total use of US corn is almost all in the processing of corn for ethanol. It also added that much of the growth in demand for US soybeans is coming from China although the use of soybean oil for biodiesel is expected to expand due to the reinstatement of biodiesel tax credits.

Another factor to note is the major drought in China. The epicentre of China’s drought-stricken area is Shandong province, a major soybean and corn producer, which is now facing its worst drought in 200 years. China’s Agriculture Ministry estimated that the area affected by drought now covers some 19.5 million acres.

Last year, a massive drought in Russia had a major impact on wheat prices.  

Palm oil stocks also remain tight, due to falling production and adverse weather conditions.

Last week the Malaysia Palm Oil Board announced that palm oil inventories had fallen to a six-month low of 1.42 million tonnes in January, attributed to lower palm oil yields, which dropped 20% year-on-year due to heavy rain and flooding.

Despite the fall in CPO prices, the Kuala Lumpur Plantation Index rose yesterday, closing 70.05 points higher at 7,932.04.

Plantation counters such as IOI Corp Bhd added 13 sen to close at RM5.71 while Kulim (M) Bhd also went up by 68 sen to close at RM14.38. Kuala Lumpur Kepong Bhd slipped two sen to RM21.86 and Hap Seng Plantations Bhd shaved off 10 sen to RM6.40. Sime Darby Bhd and Genting Plantations Bhd were unchanged at RM9.28 and RM8.10, respectively.

This article appeared in The Edge Financial Daily, February 17, 2011.