• Hurricane Matthew has affected soybean production prospect in United States
• New normal of weather anomalies
• Soybean oil price gained more than 5% to above 35 US cents per pound
• The news is positive to CPO price
• Maintain our Oct-2016 inventory forecast of 1.57m MT
• Maintain POSITIVE view on the sector with BUY calls on KLK (TP: RM27.38) and IOICORP (TP: RM5.05)

Hurricane Matthew has affected soybean production prospect in United States. According to Reuters, Hurricane Matthew has caused USD1.5b (or RM6.3b) worth of damage to more than 100,000 homes, businesses and government buildings in North Carolina. We gather that Hurricane Matthew has also affected soybean production significantly in North Carolina with yields in other states are likely to be affected as well. Note that North Carolina produced 57.28m bushels of soybean in 2015 or 1.5% of total US production. Hurricane Matthew was a Category 5 Atlantic hurricane (the highest scale) based on Saffir–Simpson scale.

New normal of weather anomalies. The Strong El Nino has ended only recently in May-2016 and palm oil production has been severely affected with Malaysia’s first 9 months of 2016 (9M16) production down -15%yoy to 12.6m MT (against 14.9m MT in 9M15). Additionally, US Climate Prediction Centre has mentioned that La Niña is favoured to develop (~70% chance) during the Northern Hemisphere fall 2016 (22 Sep 2016 to 20 Dec 2016). As a result, we believe that the world has entered into a new normal of weather anomalies.

Soybean oil price gained more than 5% to above 35 US cents per pound. In the Chicago Board of Trade (CBOT) market, soybean oil price has increased significantly. We believe that the increase is caused by the lower soybean production prospect from United States coupled with strong export of soybean from the country.

The news is positive to CPO price. As CPO is commonly used as a substitute for soybean oil, the gain in soybean oil price should improve the price competitiveness of CPO. Yesterday, CPO price has gained RM111/MT (or 4.2%) to RM2,769/MT.

Maintain our Oct-2016 inventory forecast of 1.57m MT. Key assumptions are: i) export growth of 7%mom, and ii) production growth of 3%. Although cargo surveyors data show export decline of -5%mom in the first fifteen days of October, the recent increase in soybean oil price should improve the export for CPO. For production growth we are using seasonal factor to estimate the 3% growth.

Maintain POSITIVE view on the sector; BUY KLK (TP: RM27.38) and IOICORP (TP: RM5.05). We expect CPO price to stay at the range of RM2,500 to RM3,000 per MT in the next three months. Our top pick is KLK (BUY; TP RM27.38) due to its high exposure to palm oil business and good earnings growth of +18%yoy to RM747m in 9MFY16. We also like IOICORP (BUY; TP RM5.05) due to its pure exposure to palm oil business both in the upstream and downstream divisions. The Company’s profit is also expected to recover in FY17 after the uplift of RSPO suspension.

Source: MIDF Research - 18 Oct 2016