Malaysia's palm oil inventory rose to 2.06m tonnes inFebruary due to the sharp increase in processed palm oil  imported from Indonesia, without which the inventory would have been flat m-o-m.We suspect this is temporary and will only artificially suppress palm oilprice.  Although we believe palm oilprice can still scale higher due to potentially disappointing production in thenear term, we are concerned about a potential pullback in soybean price. Onfurther price strength, we would suggest a tactical sell on plantation stocks.Maintain Neutral on sector.

Probably some upsidestill. We have yet to see the full impact of a seasonal decline in production,which could be sharper than usual due to the tail-end effects of the 1QCY10 droughtwhich hit Sabah, Sarawak and parts of Kalimantan. We see no logic  for the record pace with which  Indonesia's processed palm oil  is flowing  into Malaysia and believethis is temporary in nature. Nevertheless, this is triggering a pullback inpalm oil price as the market was expecting inventory to decline to 1.9m tonnes.

Soybean vulnerable topullback. While the market continues to be concerned about disappointingsoybean yield from drought-stricken South America, the near record speculativelong position suggests that a lot of expectations have been priced in. Regardlessof how the actual yield turns out, completion of the harvesting season will removethe uncertainties and long liquidation will take place. This is especially sowith prevailing Enso-neutral conditions, which will bode well for the upcomingNorth American planting season.  Althoughit may not happen just yet given the narrow discount of USD80 per tonne thatpalm oil is currently trading at against soybean oil, a correction in soybeanprice could spark off a sharper correction in palm oil price.

Maintain Neutral onsector. We  are maintaining ourNeutral call on the sector. Our view that palm oil price will undergo a pricelull after some excitement in 1Q is unfolding as expected. Though the averagepalm oil price of RM3,163 exceeds our assumption of RM3,000, we think it is tooearly to raise our price assumption as some price weakness could be seen in 2Qand 3Q.

Source: OSK188