The bull-run in crude palm oil prices could be coming to an end sooner than

many believed until recently. On Bursa Malaysia in Kuala Lumpur, crude palm oil price touched a season high of a little over Malaysian Ringgit 3,600 a tonne earlier this month; but has corrected down by about RM 200 in the last few days. Holders of speculative long positions especially hedge funds have begun to exit the market because of a view that the current tightness may not last

long contrary to expert assertions. More softness in palm oil prices could be in store as technical analysts suggest that the bullish momentum of crude palm oil futures have now been lost after rallying for nearly three months.

Admittedly, the current market fundamentals for global vegetable oils in general and palm oil in particular are tight. The tightness is the result of a sharp

decline in weather-affected South American soyabean crop. Given its price

discount over soyaoil, crude palm oil will readily go to meet the shortfall in supply.

However, despite tight fundamentals, as is their wont, market participants and especially speculators, are looking beyond current tightness. They are taking their trading decisions today based on the outlook three to six months ahead. There is nothing new in this approach because futures market participants seldom trade on current fundamentals, but rely on likely changes in fundamentals at a future point of time. What's in store ahead? First, palm oil's peak production season has started in right earnest, and is expected to go on till October. Production growth in Indonesia is expected to be strong especially in 2012-13 season as a large number of plantings that took place during the last five-seven years will all come of age for peak production. It is estimated that about 2.5 million hectares were planted between 2005 and 2009.

Indonesian plantation companies would strain every nerve to maximise production and export of palm oil because they enjoy the advantage of export-friendly trade and tariff policies.

Indeed, Malaysian downstream players are reported to be importing crude palm oil from Indonesia because of lower prices.

At the same time, the outlook for Malaysian producers runs the risk of worsening because of competition from Indonesia. Import of CPO from Indonesia has meant that Malaysian inventories have not fallen even during the low production season that ended last month. Going forward, stocks will build rather than deplete. Because the global vegetable oil markets are well integrated, what's happening in the US in terms of soyabean planting will have an impact on soyaoil futures and by implication on palm oil futures. At present, planting conditions are ideal in the US. There is strong expectation that the final planted acreage will be about 75 million acres, above the 73.9 million acres that came out in the prospective plantings report. After the survey was conducted in February, soyabean prices have rallied, creating an incentive for expanding the actual planted acreage. In other words, come September, the world can expect a near-record US soyabean harvest. With substantial easing of tightness ahead, there will be downward pressure on vegetable oil prices in general and palm oil prices in particular.

Crude palm oil prices can potentially begin to come-off by June with good supply prospects and limited demand in northern hemisphere because of the summer season. Prices could be range-bound at RM 3250-3,450 a tonne in the second quarter after which there is potential for a 10 per cent correction.

In dollar terms, prices at $ 950 to 1,050 a tonne look eminently possible.

Unanticipated weather events can of course create upside risk for prices.

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