According to the latest United States Department Of Agriculture (USDA) Acreage report, US farmers will plant 77.73m acres of soybean in 2013, which is within the consensus estimate of 77.81m acres. Although USDA also mentioned that the area for harvest is estimated to be at a record high of 76.9m acres, we believe that the market should have priced in this estimate judging from the recent falls in both soybean oil and CPO prices last week. Hence, we believe that the news is neutral to CPO prices. Looking ahead, we believe that Malaysian palm oil inventory should continue to decline in Jun-2013 to 1.75m mt and this should be positive to CPO prices. For the upcoming 2QCY13 earnings season, we believe the results should be unexciting as CPO prices remained low at RM2320/mt (-28% YoY and flat QoQ) for the quarter. However, we believe that IJMP and TSH  should be able to register good earnings growth as we expect their FFB growth  to exceed 35% YoY. PPB should also perform better YoY due to the earnings  recovery in Wilmar. We are maintaining our OUTPERFORM calls on IJMP (TP: RM3.50), TSH (TP: RM2.60) and PPB (TP: RM15.20). Our MARKET PERFORM calls are maintained on SIME (TP: RM9.80), IOICORP (TP: RM5.40), KLK (TP: RM21.86), FGVH (TP: RM4.60), GENP (TP: RM9.85) and UMCCA (TP: RM7.55). However, we continue to recommend an UNDERPERFORM on TAANN (TP: RM3.55) due to its high operating cost issue.

Soybean planting acreage in US came in within the consensus estimate. According to the latest USDA Acreage report, US farmers will plant 77.73m acres of soybean in 2013. This came in very close to the consensus estimate of 77.81m acres. Although USDA also mentioned that the area for harvest is estimated to be at record high of 76.9m acres, we believe that the market should have priced in this estimate judging from the recent falls in both soybean oil and CPO prices last week. Hence, we believe that the news is neutral to CPO prices.

Next data to watch will be MPOB’s Jun-13 stocks level. MPOB is expected to release its Jun-13 CPO statistics on 10 July 2013. We expect the inventory level to decline by 4% MoM to 1.75m mt. For the month of June, we believe that demand will be strong for palm oil due to the stock-up activities ahead of Ramadhan and the warm weather in the Northern Hemisphere. As palm oil tends to solidify in cold temperature, it is used more during the warm-weather period. We think the sustained decline in inventory should be positive to CPO prices.

Spot CPO prices remained low at ~RM2320/mt in 2QCY13, FFB growth to make a difference in 2QCY13 earnings. Based on the daily MPOB spot prices for CPO, we estimate that CPO prices stayed at a low level of an average price of RM2320/mt for the quarter. This represents a significant 28% decline YoY and flat growth QoQ. In the current low CPO price environment, we believe that planters with higher FFB growth should fare better. Hence, we believe IJM Plantation and TSH should be able to register good earnings growth in the coming quarter as their very strong FFB growth (estimated to exceed 35% YoY) should be able to offset the effect of lower CPO prices on their earnings.

Weather indicator has entered La Nina zone but it’s still too early to confirm the onset of La Nina. The latest SOI value has surged to +12.8 (as of 29 Jun) and this is higher than the La Nina threshold of +8.0. Note that SOI readings above +8.0 indicate La Nina weather conditions, which mean excessive rains in major palm oil-producing countries such as Malaysia and Indonesia. According to the Australian Bureau Of Meteorology, “while the vast majority of climate models surveyed by the Bureau suggest neutral ENSO conditions will persist through the winter, the development of La Niña in 2013 cannot be fully ruled out”. Our reading of the SOI value is that while it has stayed above +8.0 throughout Jun 2013, it is still too early to confirm the return of La Nina.

Source: Kenanga