According to the latest USDA Grain Stocks report, US soybean stocks came in at 999m bushels or 5% ahead of the consensus estimate of 948m bushels. However, the USDA Prospective Plantings report showed that US farmers intend to plant only 77.1m acres in 2013 and this came in 2% below the consensus estimate of 78.4m acres. The net impact of the significantly higher than expected US soybean stockpile but slightly lower than expected soybean planting acreage is negative to CPO prices as it has a strong correlation with soybean oil prices. The sentiment on CPO prices may also be negatively affected after corn prices hit limit down in the CBOT market. Nevertheless, we think that the CPO price downside is limited as we expect Malaysia’s palm oil inventory to decline 5% MoM to 2.31m mt in Mar-2013. As the consensus is still estimating an average 2013 CPO price of RM2860/mt (against 1Q13 average price of RM2322/mt so far), we believe that 1QCY13 earnings will likely to disappoint when they are announced in May-2013. We are maintaining UNDERPERFORM calls on SIME (TP: RM8.82), IOICORP (TP: RM4.34), KLK (TP: RM19.30), FGVH (TP: RM4.00), GENP (TP: RM7.60), IJMP (TP: RM2.75) and TAANN (TP: RM2.84) due to the low CPO price outlook and MARKET PERFORM calls on TSH (TP: RM2.00) and UMCCA (TP: RM6.70). Our only OUTPERFORM call is on PPB (TP: RM15.00) as we expect it to benefit from Wilmar’s earnings recovery (good prospect seen in both soybean crushing and palm oil downstream divisions).

Higher than expected soybean inventory in US is negative to CPO prices. According to the latest USDA Grain Stocks report, US soybean stocks came in at 999m bushels. These were 5% higher than the consensus estimate of 948m bushels. However, the USDA Prospective Plantings report showed that US farmers intend to plant only 77.1m acres in 2013 and this came in 2% below the consensus estimate of 78.4m acres. The overall impact of a significantly higher than expected US soybean stockpile but slightly lower than expected soybean planting acreage is negative to CPO prices as it has a strong correlation with soybean oil prices. As it is, CBOT soybean oil has already declined by 1.4% to 50.11 US cents per pound as a result of the negative news. Nevertheless, we think that the CPO price downside is limited as we expect a seasonal demand recovery for CPO in the near term due to the warmer weather in the Northern Hemisphere after the winter season ended in February.

Sentiment may be affected after corn prices hit limit down. US corn inventory also came in significantly higher than expected at 5.40b bushels or by 8% ahead of the consensus estimate of 5.00b bushels. The negative news sent CBOT corn prices tumbling by 40 US cents per bushel or 5.4% to 695.25 US cents per bushel. Note that the 40 US cents per bushel movement is the maximum daily change allowed by the CBOT. In our view, this may affect investor sentiments across all the other grains and vegetable oils (including CPO), at least in the near term.

Next data to watch will be MPOB Mar-13 stocks level. MPOB is expected to release its Mar-13 CPO statistics on 10 Apr 2013. We expect the inventory level to decline by 5% to 2.31m mt as we expect exports to pick up by 14% MoM to 1.59m mt as the winter season in the Northern Hemisphere ended last month in February. Note that palm oil tends to solidify in the cold season. While we also expect the production to increase to 1.48m mt, it should be lower than the total exports of 1.59m mt, thus leading to a lower inventory level MoM. We think the lower stock level expected in Mar-13 should lend support to CPO prices.

Reiterate UNDERWEIGHT, looking to another earnings disappointment in May-2013. As the consensus is still estimating a 2013 average CPO price of RM2860/mt as compared to the average spot CPO price of RM2322/mt in 1Q13, we believe that 1QCY13 earnings will likely to disappoint again.

Source: Kenanga