This article first appeared in The Edge Financial Daily, on July 12, 2016.

Plantation sector
July 11
Maintain neutral: Malaysian crude palm oil (CPO) futures prices slumped by as much as 5.5% last Friday to their lowest level in nine months, following losses in rival soyoil and on sluggish export demand. Benchmark palm oil futures for September delivery on Bursa Malaysia Derivatives closed down 5% (or RM117 per tonne) at RM2,241 per tonne, the lowest level since Oct 9, 2015.

In its latest planting report on July 6, the US Department of Agriculture revised up its estimates of plantings to 94.1 million acres (38.08 million hectares) of corn, 83.7 million acres of soybean, and 50.8 million acres of wheat. These compare with March intentions of 93.6 million acres of corn, 82.2 million acres of soybean, and 49.6 million acres of wheat.

Improved rainfall in Midwestern US since early July has led the market to remove the weather risk premium attached to soybean crops against crop damage from the projected La Nina event.

Brent crude oil prices fell 7% during the week to US$46.76 (RM186.57) per barrel. The sharp drop in crude oil prices may trigger concerns about potentially weaker biodiesel demand. We estimate that at the current crude oil price level of US$47 per barrel and exchange rate of RM4/US$1, the CPO-biodiesel break-even level is RM1,287 per tonne without government subsidy, and RM1,887 per tonne with government subsidy.

CPO prices last Friday were tracking the decline in soybean oil prices to ensure that CPO remains price-competitive, as palm oil heads into the high production season in August. CPO prices currently trade at a US$134/US$24 per tonne discount to US/Brazil soybean oils.

Palm oil stockpiles in Malaysia could rise by 4% to 13% as at end-June, based on our estimate as well as poll estimates by Reuters and Bloomberg.

This could lead to short-term weakness in plantation counters as weaker palm oil prices, coupled with lower output due to lagged effects of El Nino, will be negative for earnings. However, CPO prices are still broadly within our expectations of an average of RM2,400 per tonne for the second half of 2016.

We keep our “neutral” rating and earnings forecasts for regional planters. The concern over earnings risk for planters is partially offset by the undemanding equity value/hectare for selected planters. Our key picks in the region are AALI, FR and GENP. — CIMB Research, July 10