Highlights

• Farmers still favour soybean over corn… According to the newly released USDA prospective planting report, farmers are favouring soybean over corn. Corn acreage is estimated to decline by 1.5% to 89.2m acres, while soybean acreage is expected to rise by 1.1% to 84.6m acres.

• The record high soybean planting figures by USDA may have already been reflected in the recent soybean oil price movement, hence stemming prices of soybean oil (as well as palm oil) from declining further in the near term, as the planting intentions for soybean is about 1.5% below consensus estimates. Besides, the positive palm oil shipment data by SGS (+14.8% mom to 1.14m tonnes in Mar-15) should cushion near-term palm oil prices.

• While the latest development is Neutral for palm oil price, we continue to hold to our less-than-bullish view on the sector’s outlook over the slightly longer term, mainly on the back of: (1) Palm’s narrow discount against soybean oil (which will cap demand and prices of palm oil); (2) Low crude oil price (which will curb voluntary biodiesel consumption): and (3) Higher production cost arising from sticky fertilizer prices and higher labour cost.

• CPO price assumptions maintained for now. YTD, CPO price averaged at RM2,265/mt. We are maintaining our average CPO price assumptions of RM2,300/mt and RM2,400/mt for 2015-2016 for now, pending a further review with downside bias. Based on our estimates, every RM100/mt decline in our average CPO price assumption will bring down plantation companies’ earnings (under HLIB’s coverage) by 2.2-9.9% (see Figure 2).

• Neutral stance maintained. Maintain Neutral stance on the sector, with no top pick.

Catalysts

• Implementation of higher biodiesel mandate in Indonesia and Malaysia

• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO
• India imposes higher import duty on CPO
• Escalating production cost (in particularly, labour cost)

Rating

NEUTRAL

Positives

• Long term sector outlook remains favourable

Negatives

• Weak demand and price outlook

Top picks

• None.

Source: Hong Leong Investment Bank Research - 1 Apr 2015