We  remain  bullish  on  the  sector.  The  palm  oil  price  rally  in  the  past month will likely start  drawing fund flow into the plantation stocks. We continue to like First Resources (FR SP, BUY, FV: SGD2.86), Astra Agro Lestari  (AALI  IJ,  BUY,  FV:  IDR29,291)  and  IOI  Corp  (IOI  MK,  BUY,  FV: MYR5.11). Laggards such as Golden Agri (GGR SP, BUY, FV: SGD0.66) as well as growth stock Jaya Tiasa (JT MK, BUY, FV: MYR2.80), should also benefit from rising buying interests. 

Palm oil price rally. With the  MYR277 advance in palm oil price in the past  month,  our  average  price  assumption  of  MYR2,700/tonne  for  this year  now  looks  very  achievable  despite  the  YTD  average  of  just MYR2,593/tonne.  Our  price  assumption  implies  that  the  palm  oil  price needs  to  hit  a  peak  of  MYR2,850/tonne,  which  is  also  the  breakeven point  of  producing  biodiesel  and  selling  at  Mean  of  Platts  Singapore (MOPS)  benchmark  diesel  price.  We  concede  that  if  Indonesia’s biodiesel programme is  the  only  price driver,  the  palm oil  price  rally  will probably stall at MYR2,850. There are, however, other bullish factors at play which could push palm oil prices beyond that level.  

El  Niño  development.  The  Southern  Oscillation  Index  (SOI)  has plunged into negative territory, which should trigger El Niño concerns. 

Soybean  factor.  The  soybean  price  has  turned  bullish  due  to  adverse weather  in  South  America,  compared  to  a  month  ago  when  a  bumper harvest  was  expected.  Soybean  oil  prices  have  also  moved  higher  but this  is  more  likely  to  have  been  led  by  palm  oil  prices  rather  than soybean prices, as indicated by the still narrow palm oil-soyoil spread of USD52/tonne.  We  continue  to  expect  palm  oil  to  narrow  its  discount  to soyoil over the course of 2014, as the stock-to-usage ratio falls to 2009 levels.  

Climbing a wall of worry. We believe this is still in the early stages of a bull market as funds have just started to flow into the palm oil sector and valuations  remain  inexpensive.  The  reversal  speculative  net  short position  for  soyoil  suggests  that  the  market  is  no  longer  bearish  on vegetable  oil.  There  are  still  many  skeptics  on  the  sustainability  of  the price rally, which we view as a good thing.

Indonesia’s palm oil export growth to stall (Bloomberg, 3 Mar 2014)

Indonesian Palm Oil Association expects the country’s palm oil export to stall at 21m tonnes  this  year,  as  consumption  climbs  as  much  as  38%  to  11m  tonnes  while production rises to 31m tonnes from 28m tonnes. The increase in consumption is due to a conversion to biodiesel Comments:  This is not surprising as Indonesia’s production growth is about 3m tonnes  in  a  good  year,  all  of  which  will  be  used  by  Pertamina  alone.  We  believe production  will  grow  around  2.0-2.5m  tonnes  this  year,  which  implies  a  decline  in Indonesia’s export, as the available amount for export will be reduced by local usage.

Brazil’s soy harvest reaches 38%  (Bloomberg, 3 Mar 2014)

Crop  consultant  AgRural  said  that as of 28 Feb, Brazil’s soybean harvest reached 38% of total estimated area, compared with 36% a year ago and the 5-year average of 31%. Its forecast of 87m tonnes is to be reviewed in 1H of March.

Oil World cuts South America’s soybean production forecast (Oil World, 21 Feb 2014)

Oil  World  lowered  its  forecast  for  South  American  soybean  production  to  151.8m tonnes from 158.8m tonnes. Of the 7m-tonne cut, Brazil made up 4.5m tonnes, while Argentina and Paraguay comprised 1m tonnes each. In Brazil, the unusually hot and dry  conditions  since  mid-January  have  caused  irreversible  losses  to  the  soybean crop.  In  Argentina,  wetness  has  caused  disease  infestation,  which  will  reduce production.

Pertamina’s second biodiesel tender (Jakarta Post, 17 Feb 2014)

Indonesia’s national oil company Pertamina secured 45% of its biodiesel requirement with the completion of its second tender, amounting to 2.4m kilolitres for 2014-2015 usage.  In  the  next  phase,  the  company  would  seek  supply  for  Sumatra,  Nusa Tenggara,  parts  of  Kalimantan,  Sulawesi  and  Papua,  with  the  total  need  amounting to 850,000 kilolitres of fatty acid methyl ester (FAME) per year. Comments:  Various  ministries  stepped  into  the  discussion  between  Pertamina  and biodiesel  producers,  which  showed  the  Indonesian  government’s seriousness  in pushing through the biodiesel programme. We understand that Wilmar (WIL SP, NR) has  the  lion  share  of  the  second  tender  with  1.1m  tonnes,  priced  at  MOPS.  We believe  there  will  likely  be  subsequent  tenders  to  secure  further  supply,  which  will likely  to  be  at  a  premium  to  MOPS  to  cover  transportation  costs  to  supply  to  more remote parts of Indonesia.

El Niño update (Australia’s Bureau of Meteorology, 25 Feb 2014)

The  El  Niño–Southern  Oscillation  (ENSO)  remains  neutral  –  neither  El  Niño  nor  La Niña. However, warming of the tropical Pacific Ocean is likely in the coming months, with international climate models surveyed by the  Australia’s Bureau of Meteorology showing Pacific Ocean temperatures approaching or exceeding El Niño thresholds in the  austral  winter.  Model  outlooks  that  span  autumn  tend  to  have  lower  skill  than outlooks  made  at  other  times  of  the  year,  and  hence  should  be  used  cautiously  in isolation. Recent observations add weight to the model outlooks. The tropical Pacific Ocean subsurface has warmed substantially in recent weeks, which is likely to result in a warming of the ocean surface in the coming months. A strong burst of westerly wind  occurring  now  over  the  far  western  tropical  Pacific  may  cause  further  warming of the subsurface in the coming weeks.  
Comments: As drought will be experienced 3-4 months ahead of official El Niño, we believe investors should not wait for confirmation as prices would have reacted.

Source: RHB