KUALA LUMPUR (Nov 30): MARC Ratings Bhd sees a "slightly positive" price trend for palm oil going into 2024, with crude palm oil futures projected at between RM3,700 and RM4,100 per tonne from now till 2024.

Seasonal production trends, hotter climate conditions and higher demand for biofuels are expected to exert upward pressure on palm oil prices, MARC said in a statement.

"In the near term, supply constraints are expected to drive up palm oil prices. Typically, palm oil production declines after peaking in September or October, with the first quarter of the year having the lowest output. This seasonal trend of lower production will reduce palm oil inventories, exerting upward pressure on prices, especially in 1Q2024.

"Furthermore, El Niño’s hotter and drier weather conditions in Southeast Asia have impacted Indonesia, the largest palm oil producer. With El Niño’s impact on palm oil production typically seen at least a year later, production is expected to be reduced in 2H2024. Additionally, in the major palm oil–producing countries Malaysia and Indonesia (83% of global production as at Nov-2023), a stagnation in oil palm plantation area growth, shrinking areas of immature oil palm plantations, and unproductive mature trees will impede overall production growth," MARC said.

In addition, soybean oil, a key palm oil substitute, has also been affected by El Niño weather conditions in Brazil, impacting the planting pace in Mato Grosso and Parana that account for around 40% of Brazil’s soybean production, MARC noted.

“As such, palm oil price will be supported by potential convergence with soybean oil price as discounts narrow amid uncertain soybean supply,” it said.

On the demand side, biodiesel use will be another driving factor for the favourable price trend of palm oil.

It noted that Indonesia has implemented the mandatory usage of biodiesel with 35% palm oil (B35) in the transportation sector, and the United States Department of Agriculture (USDA) is forecasting global palm oil consumption to increase by 4.9% to 77.2 million metric tonnes in 2024.

At the same time, memoranda of understanding between China and Malaysia to secure palm oil supplies are expected to support demand, said MARC.

And if there is lower-than-expected soybean and sunflower seed production that further narrows the discount gap on technical convergence between palm oil and soybean prices, then CPO prices may stay above RM4,000 per tonne, MARC said.

"On the flip side, downside risks to these estimations include lower-than-expected demand from India and China, the loosening of Indonesia’s export restrictions, favourable weather conditions, and higher-than-expected production of edible oils. 

At the time of writing, futures CPO contract for delivery in March was trading at RM3,917 per tonne.