Palm Oil Declines as Demand Wanes After Rally to Two-Week High

By Claire Leow

Feb. 16 (Bloomberg) -- Palm oil futures dropped in Malaysia as demand diminished after the vegetable oil’s rally last week to a two-week high.

April-delivery futures dropped 1.6 percent to 1,963 ringgit ($425) a ton at 5:11 p.m. on the Malaysia Derivatives Exchange. Earlier, the contract rose above 2,000 ringgit for the first time since Jan. 7. Prices have risen 12 percent in the past two weeks.

“I don’t understand why palm oil should rise above 2,000 ringgit” a ton, said Ben Santoso, an analyst with DBS Vickers Securities Singapore. “The risk is planters cutting back on re- planting if palm oil prices stay high, which will bring on a more-than-expected supply,” capping price gains.

Drought has damaged soybean crops in Brazil and Argentina, the biggest exporters of the oil crushed from the oilseed, at a time when oil palms in Malaysia and Indonesia, the top producers of the tropical oil, are stressed from last year’s record output. That helped push up palm oil prices in the past two weeks. Palm and soybean oils are substitutes.

A smaller soybean crop in South America may prompt farmers in the U.S. to shift from corn to soybeans, likely lowering the price of the oilseed, Santoso said.

“The highest risk now is from the U.S. and whether they will make the shift,” he said. “If there is some shift, then there will be some correction to soybean prices in the second quarter. It’s still too early to say.”

The U.S. will announce soybean crop estimate next month.

Soybean oil for March delivery dropped 0.3 percent last week to 33.3 cents a pound in Chicago. That left it 32 more expensive than palm oil, compared with a six-month average of 58 percent, according to Bloomberg data.

The U.S. markets are closed today for a public holiday.

To contact the reporter for this story: Claire Leow in Singapore at cleow@bloomberg.net;