Palm oil futures surge as Malaysian output set to fall below 20m mt

Malaysian palm oil futures surged to a fresh three-year high on Friday as Malaysian palm oil production for 2019 was set to fall more than initially anticipated.

Production is set to come in just below 20 million mt after initial production data for December came out late on Thursday. 

After already gaining 2.4% during the Thursday session, the front March contract on the Bursa Malaysia jumped another 2.3% on Friday to hit MYR3,072/mt ($744.55/mt) – the highest level on the front month contract since early February 2017.

Palm oil prices are up over 44% since the start of Q4 – their best quarterly gain since Q4 2010.

Drier weather across most of South East Asia this year has limited yields in Indonesia and Malaysia – which together represent just shy of 70% of global production – boosting global palm oil prices.

Palm oil production in Malaysia during the first 20 days of December was down 16.4% on the month, while market analysts were expecting the monthly fall to come in at 14%, data by the Malaysian Palm Oil Association (MPOA) showed Thursday.

“Lower output in 2019 and lower still in 2020 been the main impetus for prices to skyrocket to fresh three-year highs today and yesterday. MPOA confirmed the 1-20 Dec data showing the sharp production drop yesterday,” Sathia Varqa, the owner and co-founder at Palm Oil Analytics told Agricensus on Friday.

“Malaysia 2019 output will definitely be just below 20 million tons in 2019, lower than initial expectations,” Varqa added.

It would mean that Malaysian palm oil production will have shrunk this year from last year’s 20.8 million mt output and will fall well below the earlier expectations of 21 million mt.

Anilkumar Bagani, research head at Mumbai-based vegoil broker Sunvin Group, agreed saying: “Palm oil prices are up because of lower than estimated palm oil production and increased biodiesel mandates at Malaysia and Indonesia.”

Meanwhile Dalian soyoil futures surged 2% on Friday while palm olein futures jumped 3%, and US soyoil futures were trading up 1% at a two-year high, all supporting Malaysian palm oil futures to trade north of the MYR3,000/mt-mark.

“Repeated announcements on biodiesel mandates in Indonesia and Malaysia reinforced the bullish sentiment that is already pervasive in the market,” Varqa added.

Indonesia is set to implement its B30 biodiesel mandate from the start of next month – up from its current B20 mandate – boosting domestic palm oil consumption.

Meanwhile, Malaysia is doubling its mandate to B20 – but will only fully implement this nationwide by December 2020.