A glut of palm oil in Malaysia and Indonesia is weighing down the canola market, say analysts.
“Palm prices hit a three-year low (last) week and basically lost approximately 30 percent over the last few months,” said Errol Anderson, market analyst with ProMarket Wire.
China has slowed its purchases of palm oil because of its faltering economy, resulting in a backup of the product in ports in Southeast Asia.
There are also reports that Indian buyers are refusing to accept shipments because they negotiated contracts this summer at much higher prices than they are today.
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Malaysia’s palm oil stocks are estimated at 2.5 million tonnes in September, up from 2.11 million tonnes in August and two million tonnes in July.
Anderson said the palm oil doldrums are keeping soy oil prices in check, which influences canola oil and canola seed markets.
DTN reports that the palm oil is trading at a $425 per tonne discount to soy oil, which is much higher than the normal $100 to $150 per tonne spread.
“One would think that it will be difficult for soy oil and canola to stage a significant comeback with such significant stocks of less expensive competing oils weighing on the market,” DTN analyst Cliff Jamieson said in a recent blog.
Canola rallied last week on news that Statistics Canada thinks the crop is two million tonnes smaller than it was in July.
However, Anderson thinks canola could easily drop $2 per bushel from today’s prices because of the palm oil glut, which he believes will be not be resolved until mid-winter.
“At some point we’ve got $550 (per tonne) canola written all over this market,” he said.
Others are more optimistic about the palm oil outlook.
Standard Chartered research analyst Abah Ofon is advising investors to “buy into the current dip.”
“The (crude palm oil) market has dropped sharply in recent weeks amid mounting concerns over sluggish demand,” he said in a research note. “We argue that the slide in prices is overdone and is amplified by lack of clarity on key industry events.”
Ofon is calling for a 38 percent increase in palm oil prices by the end of the fourth quarter.
Bill Nelson, senior economist with Doane Advisory Services, also believes palm oil prices will rebound.
“I expect it’s kind of a short-term phenomena,” he said.
Reuters News Agency reports that the government of Malaysia is contemplating a proposal to cut palm oil export taxes to eight to 10 percent from 23 percent, which would boost exports and help reduce stockpiles of the product.
The U.S. Department of Agriculture is forecasting that India will import 7.7 million tonnes of palm oil in 2012-13 and China will buy 6.4 million tonnes. Both totals would be well above annual purchases for the previous four years.
