Stockpiles Dropped in July

The Malaysia Palm Oil Board (MPOB) reported a 5.4% decrease in palm oil stockpiles for July, bringing it down to 1.73mn tonnes after three consecutive months of increase. This stockpile level was below market expectations of 1.80-1.83mn tonnes. Exports surged 39.9% to 1.69mn tonnes, up from June's 1.21mn tonnes, exceeding market estimates of 1.49-1.60mn tonnes. Meanwhile, the production rose 14.0% MoM to 1.84mn tonnes, slightly above expectations. Imports fell 10.7% MoM to 10.5k tonnes, and domestic consumption decreased by 23.9% MoM to 260k tonnes.

YTD, the production has increased by 10.6% YoY to 10.71mn tonnes, which outgrew the exports (+9.1% YoY to 9.22mn tonnes). Imports have dropped 73.6% YTD to 162k tonnes, while domestic consumption has decreased slightly by 4.4% YoY to 2.2mn tonnes. Overall, the MPOB's July data suggests a somewhat optimistic market outlook.

Production Is on a Seasonal Upward Trend

CPO production rose by 14.0% MoM and 14.4% YoY to 1.84mn tonnes. It is worth nothing that July's production not only exceeded historical performance but was also highest ever since 2006. If this uptrend continues, the yearly production could return to pre-pandemic levels seen in 2019, reaching nearly 20mn tonnes.

The YTD production increase of 10.6% to 10.7mn tonnes was largely due to improved harvesting activities, following the resolution of labour shortage issues. We expect further production growth in coming months, in line with seasonal trends.

Exports Rebounded in July

Exports saw a strong rebound of 24.7% YoY in July, reaching 1.69mn tonnes. YTD, total exports grew 9.1% YoY to 9.22mn tonnes. Looking ahead, cargo surveyors Intertek and Amspec project that palm oil exports for the first ten days of August 2024 will decline by 12.2% and 17.7% MoM, totalling 470,706 tonnes and 435,413 tonnes, respectively.

Commodity Prices Under Pressure

The CPO spot price dropped by about 5% from a month ago, primarily due to decline in other vegetable oils, stronger Ringgit against the USD, and expectation of increasing production, which outweighed the impact of rising export shipments. Meanwhile, Chicago soybean and corn futures hit four-year lows on Monday, falling below USD10 and USD4 per bushel, respectively. Rising supplies and weak demand are likely to keep prices under pressure. The situation would likely be aggravated by large Brazilian crops that are coming to the market. According to the U.S. agricultural futures contract, the cost of crop planting in 2024 is estimated to be USD10.50 per bushel for soybean and USD4.00 per bushel for corn. This implies that, at the current spot prices, U.S. farmers leasing farmland are likely to face losses. According to the USDA, net farm income (NFI) is projected to decline by USD 43.1bn in 2024 (-27.1%) compared to 2023, marking the largest YoY drop in history. This decrease is primarily due to rising input costs and falling commodity prices.

Meanwhile, we also gathered that the soybean stockpiles in China are relatively high with inventories at major crushing plants stood at 7.34mn tonnes as of 2 August. As China enters the traditional peak season for oil consumption (September and October during the Mid-Autumn Festival and the week-long National Day holidays), the stockpiles of vegetable oil stocks are expected to reduce. All in all, we believe the overall supply is sufficient and vegetable oil prices are expected to be volatile in the short term.

Maintain Neutral

We place our sector call and target price for the companies under review, pending the release of 2QCY24 results performance. No change to our 2024 average CPO price estimate of RM4,000 per tonne and RM3,800 for 2025. We would review our assumptions if: 1) Global soybean supply turns out to be lower than market expectations, 2) a more promising demand recovery story, 3) lower-than-expected palm oil production, and 4) significant reductions in production costs.

Source: TA Research - 13 Aug 2024