Bloomberg News

Drought Draining Reserves of Oils Amid Record Demand

April 17, 2012

Workers unload trucks of harvested oil palm fruit at a plantation and production factory in Kertajaya, Indonesia. Palm oil may decline to average 3,078 ringgit in the fourth quarter because a projected surplus for the crop  won’t be entirely erased by shortages of soybean
oil. Photographer: Dadang Tri/Bloomberg

Workers unload trucks of harvested oil palm fruit at a plantation and production factory in Kertajaya, Indonesia. Palm oil may decline to average 3,078 ringgit in the fourth quarter because a projected surplus for the crop won’t be entirely erased by shortages of soybean oil. Photographer: Dadang Tri/Bloomberg

Demand for edible oils is climbing to a record as drought damages crops across South America, leaving buyers with the smallest stockpiles in three decades.

The use of soy, palm, rapeseed and six other oils will rise 3.9 percent this year, reducing the ratio of reserves to demand to the lowest since 1977, the U.S. Department of Agriculture estimates. Palm, the most-consumed oil, will advance 8.5 percent to 3,800 ringgit ($1,240) a metric ton in Kuala Lumpur by Dec. 31, the highest since February 2011, according to the median of 11 analyst and trader estimates compiled by Bloomberg.

While wheat dropped 23 percent and corn lost 19 percent in the past year as farmers reaped record crops, oilseed prices are surging after drought parched fields across South America, the biggest soybean-producing region. U.S. growers are planting the most corn acres since 1937 and reducing soybean plantings to the smallest in five years, the government estimates. Many farmers bought most of their seeds by January. Since then, soybeans have jumped 19 percent and palm oil 14 percent.

“The edible-oil market is tightening up more quickly than anyone expected,” said Wayne Gordon, an agriculture strategist at UBS AG who warned almost a year ago that drier weather would parch South America crops. “It’s in rationing mode. We have yet to see the peak in prices.”

Agriculture Index

Cooking oils advanced as drought in Brazil and Argentina contributed to a 9 percent slump in global soybean harvests, the most since 1996. Palm oil increased 10 percent to 3,503 ringgit this year and soybean oil rose 7.1 percent in Chicago as the Standard & Poor’s GSCI Agriculture Index of eight commodities declined 2.6 percent. The MSCI All-Country World Index of equities added 9.2 percent and Treasuries were little changed, a Bank of America Corp. index shows.

Retail sales of bottled oils will reach a record 38.7 million tons this year, lifting the value by 6.8 percent to $56.5 billion, according to Euromonitor International, a London- based research group.

Kuok Oils & Grains Pte., a unit of Wilmar (WIL) International Ltd., had a global market share of 8.9 percent in 2010, making it the biggest supplier to the retail market, Euromonitor estimates. Shares of Wilmar, the largest palm-oil processor and with about 50 percent of the consumer-pack edible-oil market in China, will advance 13 percent to S$5.44 on the Singapore stock exchange in the next 12 months, according to the average of analyst estimates compiled by Bloomberg.

Billion Ringgit

The Singapore-based company will report a 7.8 percent increase in net income to $1.73 billion this year, rising to $1.93 billion in 2013, the mean of analyst estimates shows. Sime Darby Bhd., (SIME) the biggest listed palm-oil producer, will make 4.1 billion ringgit in the 12 months to June 30, 12 percent more than a year earlier, according to the mean estimate of 24 analysts covering the Kuala Lumpur-based firm.

Growers in the U.S., the largest soybean producer, may plant more than originally anticipated by the USDA after the oilseed’s premium to corn increased since the end of January, said Brian Basting, a crop analyst at Advance Trading Inc. in Bloomington, Illinois. The USDA predicted March 30 they would cut plantings by 1.4 percent to 73.9 million acres.

In Brazil, the second-biggest soybean producer, the harvest may jump 17 percent to a record 77 million tons next year, according to Jeff Zimmerman, the USDA agricultural attache. The La Nina weather pattern, which brings drier weather to South America and heavier rainfall in Asia, has ended for this season, Australia’s Bureau of Meteorology said in a report March 27.

Global Growth

Cooking-oil costs may drop in the second half of the year as demand is eroded by Europe’s debt crisis and slowing global growth, said Victor Thianpiriya, a commodity analyst at Australia & New Zealand Banking Group Ltd. in Melbourne.

Palm oil may decline to average 3,078 ringgit in the fourth quarter, 12 percent less than now, because a projected surplus for the crop won’t be entirely erased by shortages of soybean oil, Thianpiriya said. His prediction would still be 43 percent higher than the 10-year average.

Demand for edible oils has been resilient to a slowdown in the global economy, history shows. Consumption of the nine biggest oils gained 3.8 percent in the 2008-2009 marketing year as economies grappled with the worst global recession since World War II, USDA data show.

Production of palm, which represents more than 30 percent of cooking-oil output, will expand 2 million tons this year, compared with a 5.5 million-ton increase in 2011, according to Dorab Mistry, the director of Godrej International Ltd. who has traded edible oil for more than three decades. He predicts prices will climb to 4,000 ringgit by June.

Dorab Mistry

Output in Malaysia, the second-biggest producer after Indonesia, will drop in the first half from a year earlier, Mistry said in remarks prepared for delivery in Beijing on March 27. Production plunged 14 percent in March from a year ago, cutting stockpiles to a seven-month low, according to data from the Palm Oil Board.

Declining supplies of soybean oil may drive importers to buy more palm. Imports by China will jump 10 percent and purchases by India are poised to increase 8.8 percent this year, the USDA estimates. India and China represent about 27 percent of global demand, the data show.

Unilever, the second-largest consumer-goods maker, may pay as much as 10 percent more for commodities from palm to crude oil to tea this year, according to Martin Deboo, an analyst at Investec Securities Ltd. in London. That compares with the company’s own estimate of about 5 percent. Investec cut its “buy” recommendation on Unilever for the first time in 17 years last month on concern that costs are rising and competition intensifying.

Margarines and Soap

About 33 percent of commodity-cost inflation at Unilever came from edible oils in the past year, the company said in a conference call on Feb. 2. The company uses about 3 percent of the world’s palm oil to make shampoo, margarine and soap, according to its website. Its shares fell 4.5 percent in trading this year. Flip Dotsch, a spokesman for Unilever in Rotterdam, declined to comment.

World soybean stockpiles will drop to 18 percent of consumption by the end of the next marketing year, from 27 percent two years earlier, the lowest level since 1997, Morgan Stanley estimates.

“We’re just not seeing planting increasing enough to prevent global stocks of soybeans falling to a fairly critical level,” said Erin Fitzpatrick, an analyst at Rabobank International in London. “With the smaller availability of these other oilseeds, palm oil demand is going to remain strong.”

To contact the reporters on this story: Luzi Ann Javier in Singapore at ljavier@bloomberg.net; Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net


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