Robust consumption (global demand has doubled over the past decade) for crude palm oil and its underlying derivative products such as cooking oil, cosmetics, toiletries, and industrial cleaning agents (i.e. all fairly demand sticky goods) led by China and India (5%/annum growth over the past four years, propelled of late by government restocking in the face of inflation-induced reserve releases, in the former and 16% y/y in the past five years for the latter, augmented partially by a lagging domestic peanut oil sector) coupled with La Nina-related, mediocre crop yields in Argentina (the third largest exporter of soybeans and the top exporter of soybean oil) and El-Nino related low yields in Malaysia (which, coupled with Indonesia, supplies roughly 90% of global palm oil production) may help sustain futures prices in the short-term.  Analysts point to Singapore-listed Golden Agri-Resources, for one, as a firm that will likely continue to benefit.  Barclays projected “global stocks could fall to around 4.5 weeks of consumption–the lowest level in over 30 years” and will rebound only to the degree that governments in Malaysia and Indonesia resist meddling with price controls and export restrictions (to assuage the retail sector they already control prices and subsidize VAT) and weather patterns comply (historically, “yields [should] improve in the second half of 2011 as El Nino’s lagged impact wears off and drier weather allows harvesting and transportation to return to normal operations”).  To that end, ECM Libra, an investment bank, notes that an examination of atmospheric indicators such as the Southern Oscillation Index (SOI) and its inverse relationship with the monthly change in Malaysian palm oil production is positive in terms of the probability of near-term yields mean-reverting (“January saw the SOI index trending down to 19.9 from a high of 27.1; to note, the 27.1 reading was the highest La Nina reading since 1973).  That said, as with many food commodities a bona fide secular bull market (as in price inflation) in palm oil may be in the making due to notable structural restraints (in addition to the aforementioned Asian demand dynamic): Malaysia’s future yield prospects relative to current ones look dim, while environmental concerns–namely a two-year moratorium on deforestation based in part on Indonesia’s bilateral treaty with Norway–may interminably hamper Indonesian output (though per Greenpeace said edict in reality has far more bark than bite).

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