Malaysian palm oil production in September was slightly below August, the 2nd consecutive monthly decline, and also slightly under expectations at 1.8 MMTs. However, monthly production figures have recovered from the previous year’s drought and largely been above a year ago since December. Total production for the 2016/17 crop marketing year totals 18.9 MMTs, a 7% recovery from a last year but still less than the 5 year average and the 2nd lowest annual total since 2012/13. The latest estimates from the USDA project annual production in 2017/18 will increase by 2.1 MMTs (11%) to a record large 21 MMTs as palm plantations expand by 6%, while palm oil yields are expected to average 5% better through the year. The chart shows monthly production estimates needed to reach the USDA forecast, which need to be record large every month. 1 miss will put the USDA’s forecast in jeopardy.
While monthly production slipped to a 3 month low, exports were slightly above expectations and reached a 13 month high of 1.5 MMTs. End of month September stocks still increased slightly and were counted at just over 2 MMTs, 4% larger than August, and 31% larger than a year ago. The USDA tends to adopt the Malaysian Palm Oil Board’s production, use, and stocks figures, and the October WASDE was updated to reflect the slightly larger Malaysian palm oil stocks figure. This also loosened up the global palm oil and vegetable oil balance sheets. Both export and domestic Malaysian palm oil use are projected to be record large in the year ahead; however, production will again exceed demand, as record large palm oil stocks of 2.9 MMTs are projected by the end of next year, which looks to slow world vegoil rallies.
Though produced, and largely consumed in opposite regions of the world, the chart shows that the US soyoil and Malaysian palm oil futures are driven by similar global supply and demand fundamentals. Soyoil typically trades at a premium, and the widening or narrowing of price spreads are often driven by short term changes in currencies or commodity specific changes in fundamentals. In 2007-08, both vegoil markets rallied as world biofuel markets expanded, though soyoil traded out to a 20 cent/lb premium on strong speculative demand and biodiesel expansion in the US. The spread widened back to 20 cents again in 2012 as palm oil production was record large, while the US markets rationed reduced supply following the drought. On average, soyoil trades at a 4-5 cent premium to palm oil, but that spread could widen in the year ahead as US biofuel demand expands, as palm oil production reaches record levels.