Golden Agri reveals what may be the real culprit behind weak CPO prices

Your guess is as good as ours.

According to DBS, Golden Agri Resources explained that CPO prices dropped last year because of higher inventories and flat palm oil biodiesel production – due to ample oilseeds supply (as biodiesel programs in western countries are designed to support local farmers).

Currently, the market sees two bearish factors: continued oversupply and maturing trees.

But DBS noted that Golden Agri has a different view. There were significant new planting between 2006 and 2009, so palm oil production growth may slow down from here (to c.5% p.a. from 7-8% previously), while FFB yield may decelerate after two years of strong growth.

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Also, since CPO prices had dropped in 2H12, smallholders had been applying less fertiliser. The group also pointed out that while Malaysia’s CPO inventory had fallen to last year’s level, CPO prices remained significantly below last year’s level. A strong bottom for CPO prices was indicatively US$700/MT.

The group indicated that output growth may moderate from here. But there was also record low soybean inventory last year. Even though soybean harvest will recover considerably, some of this output would be employed for restocking.

Longer term, demand will mostly come from emerging economies, where the population is younger and economic growth is still stronger. Demand from Europe remains stable.

Demand from US is increasing but it is from a low base, so it will not have much impact. Demand from oleochemicals is also growing. This year, Indonesia is expected to overtake India as the largest consumer of palm oil. China demand is expected to remain stable.