• Oil World is negative on CPO prices. Although soybean prices are anticipated to be bullish due to the drought in Argentina, this will not translate to higher CPO prices. As such, the price discount between soybean oil and CPO may widen from US$100/tonne currently to US$150 to US$160/tonne.

• Oil World is of the view that CPO prices will trade sideways or slightly higher in the next three to five weeks. However from April 2018 onwards, CPO may see some price weakness. The lowest price level is estimated to be RM2,300/tonne for CPO. Oil World forecasts global palm inventory to be in a surplus of 2.2mil tonnes during the April to September period vs. a deficit of 1.6mil tonnes from January to March 2018.

• Global palm production is estimated to increase by 4.4% from 67.87mil tonnes in 2017 to 70.84mil tonnes in 2018F. Oil World anticipates CPO production in Indonesia to expand by 5.4% from 36.8mil tonnes in 2017 to 38.8mil tonnes in 2018F. In Malaysia, CPO output is expected to improve by 4.2% from 19.92mil tonnes in 2017 to 20.76mil tonnes in 2018F.

• Oil World added that there are long-term challenges facing the palm oil industry in Malaysia and Indonesia. These are labour shortages in Malaysia, low FFB yields, a slowdown in new plantings and a lack of replanting. The oil yield of other vegetable oils such as soybean has improved in the past 15 years. However, FFB yield of the oil palm tree has declined. According to the MPOB, average FFB yield in Malaysia was 17.89 tonnes/ha in 2017 compared with 19.3 tonnes/ha in 1999.

• Oil World is bullish on soybean prices due to the drought in Argentina. The weather in February in Argentina was the driest in seven years. As such, Oil World predicts soybean output in Argentina to plunge from 54.6mil tonnes in 2017 to 42mil tonnes in 2018F. If there is a drought in the US in 2H2018, this would affect US soybean production and boost soybean prices further. Currently, there are no signs of a drought in the US yet.

• James Fry was also bearish on CPO prices. He opined that CPO prices would rise briefly to RM2,600/tonne due to the current low production season. As palm production picks up from 2Q2018 onwards, CPO prices may fall to RM2,300/tonne by July 2018.

• Due to India's hike in import duties on palm products, demand will not be exciting and hence, palm inventory in Malaysia may stay above 2.3mil tonnes this year (January 2018: 2.55mil tonnes). Malaysia may end up with a higher palm inventory in 2018F compared with 2017 (December 2017: 2.73mil tonnes). Globally, CPO production is estimated to grow by 4mil tonnes in 2018F vs. 7mil tonnes in 2017.

Source: AmInvest Research - 8 Mar 2018