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[SINGAPORE] Lower output of palm oil into early next year and tight supplies of rival soybean oil are likely to bolster prices for the tropical product in the short term after they hit a four-year high this week.
Higher mandates for biodiesel production in the United States and Indonesia will further squeeze inventories of palm oil, used in products ranging from candy to cosmetics and cooking oil.
"The view is that production should recover from El Nino back to 2015 numbers, but big gains could be more towards the second half of next year as there are still the lagging secondary El Nino effects," said Ivy Ng, regional head of plantations research at CIMB Investment Bank.
The benchmark Malaysian palm oil contract this week touched its highest since 2012.
Palm oil production in Indonesia and Malaysia, which account for 80 per cent of global supplies, is forecast to decline by nearly five per cent to 58.8 million tonnes in 2016 from a year ago, following dryness caused El Nino weather pattern earlier this year, according to the US Department of Agriculture data.
Indonesia's production and exports of palm oil are expected to decline 10-15 per cent this year, Fadhil Hasan, executive director of the Indonesian Palm Oil Association, told Reuters on the sidelines of a conference in Bali on Thursday.
At the same time the country, which started implementing a subsidy-based biodiesel programme last year, is planning to boost production of the palm oil-based biofuel in the years ahead.
Its demand for crude palm oil for use in biodiesel is expected to grow 68 per cent to 10.6 million tonnes by 2020 from 6.3 million tonnes forecast for this year.
In the United States, soyoil futures surged nearly 7 per cent on Wednesday after the government set the target for total renewable fuel use for 2017 at 19.28 billion gallons, up from this year's 18.11 billion gallons.
The discount of US$70 a tonne, at which RBD palm olein in quoted in Malaysia to crude soybean oil in Argentina is expected to widen, resulting in higher demand.
"We expect the spread to widen with the mandates given by the US government," said David Ng, derivatives specialist at Phillip Futures on the sidelines of an industry conference in Indonesia's resort town of Nusa Dua. "I think price levels will sustain till production recovers next year." Palm oil demand from the food industry is also expected to rise next year.
China, which bought about 5.7 million tonnes of palm oil last year, is likely to take an additional 1 million tonnes in 2017, Zeng Guoqiang, general manager of the grains and oils division of Foretrade Investment Management Co, told an industry gathering in China earlier this month.