Malaysian CPO futures on 1 Aug '08

Malaysian crude palm oil (CPO) futures dropped a 4th week amid concern increased supplies from the biggest producers of the vegetable oil will damp prices. Palm oil futures for Oct delivery dropped 100 ringgit, or 3.3%, to 2,950 ringgit (US$904) a ton on the Bursa Malaysia Derivatives (BMD) Exchange.

Supply from Indonesia and Malaysia, which control 90% of the world's output of the commodity, is seasonally high this quarter, said Ben Santoso, a plantation analyst at DBS Vickers. Stockpiles in Malaysia reached a record 2.04 m tons in Jun, the Malaysian Palm Oil Board said.

Prices fell 15% in Jul as "fears intensified over Malaysian palm oil inventory build-up," said Santoso. "These concerns are being priced. As market participants take short positions, the negative sentiment is feeding on itself."

Palm oil closed below 3,000 ringgit a ton on Jul 29 for the first time since Dec after a drop in crude oil reduced the appeal of biofuels made from vegetable oils.

"We could go down a bit further from here," said Chris de Lavigne, a vice president at consulting firm Frost & Sullivan Inc Jul 29. "I see 2,700 ringgit as a floor."

Vegetable oils, used mainly in food, often track crude oil prices. Crude fell to US$122.10 a barrel today and is 17% below its Jul 11 peak of US$147.27.

Palm oil historically trades at a discount to soybean oil.

Soybeans declined on speculation rainfall forecast for the US Midwest will ease heat stress on plants, and as imports from China, the largest buyer, may slow after a possible state sale of soybean oil. Midwestern states in the US may get as much as 1 inch of rain next week, Meteorlogix LLC said in a report yesterday.

In China "domestic vegetable oil supply is very sufficient, so the market will remain weak in the short run," the China National Grain and Oils Information Center said in a daily report.

Soybean oil prices dropped 12% in Jul. Still, soybean oil costs 43% more than palm oil. The premium was as high as 46 % on Jul 28, the most since Jul 17 '06, according to data on the Bloomberg. The two commodities are substitutes.