Palm Oil Must Fall to Boost Biofuel, Food Demand, Mistry Says

By Claire Leow and Feiwen Rong

Sept. 10 (Bloomberg) -- Prices of palm oil, the world's most consumed vegetable oil, need to decline further to spur more demand from the biofuel and food sectors as stockpiles swell to records, said Dorab Mistry, director at Godrej International Ltd.

Palm oil would be a viable feedstock for biofuel at 2,200 ringgit a ton ($636), free-on-board, if crude oil stays around $100 a barrel and the dollar stabilizes at the current level, Mistry said today at a conference. Prices would have to fall to $550 a ton should oil fall to $80 a barrel, he said.

Palm oil has fallen 48 percent from a record on March 4 as expectations for bumper crops and swollen stockpiles have curbed demand. Crude has tumbled 29 percent from its July peak.

``High prices have over time evoked a supply response,'' Mistry said. Record high stockpiles in Indonesia and Malaysia, the world's top producers, will weigh on palm oil and ``prices have to react and correct,'' he said.

Production will jump to 18 million metric tons in Malaysia and 20 million tons in Indonesia this year as favorable weather aided harvests, he said. Stockpiles in the two countries will exceed 5 million tons by the end of November, he said.

Increasing output of other vegetable oils, including soybean oil, the main rival, will add to the glut. China is projected to produce a record 18 million to 19 million tons of soybeans this year, reducing demand from the world's largest buyer, Mistry said.

There will be ``bumper crops of oilseeds'' around the world after a timely monsoon in India and the latest Hurricane Gustav which brought the ``much-needed moisture'' to the developing soybean crop in the U.S. Midwest.

`More Balanced'

Vegetable oil supply and demand may become ``more balanced'' in 2008-09 if biofuel producers consume an additional 2.5 million tons and the food sector uses 4 million tons extra, Mistry said.

The U.S. Department of Agriculture will publish its output estimates of soybean crop in a report to be released on Sept. 12. The agency may reduce its soybean crop estimate by 50 million bushels in Sept. 12 report, but even that reduction ``may not affect prices beyond two days,'' Mistry added.

November-delivery palm oil rose 1.4 percent to 2,388 ringgit a ton on the Malaysia Derivatives Exchange at 3:28 p.m. in Kuala Lumpur. Crude oil for October-delivery on the New York Mercantile Exchange traded at $104.70 a barrel at the same time.

``It's foolish'' to assume the biofuel subsidy in the U.S. and Europe may stoke demand for palm oil, Mistry said.

``Palm diesel must not rely on any subsidy or mandate and it must be cheaper than fossil diesel and make money for producers and blenders'' to attract demand from them, he added.

Godrej International is one of India's biggest importers of vegetable oils, and Mistry has traded the commodity for more than three decades.

To contact the reporters on this story: Claire Leow in Singapore at cleow@bloomberg.net; Feiwen Rong in Singapore at frong2@bloomberg.net