Wed, 27 Aug 2008
Achmad Syafriel, Analyst

Crude palm oil (CPO) price movements have been nothing short of a roller-coaster ride. From a mid-June 2006 price of around US$400 per ton, it shot up 350 percent to $1,400 per ton in Rotterdam before plunging 37 percent to the current level.

The million dollar question is: Where are CPO prices headed.

In the U.S., Federal Reserve Chairman Bernanke signaled last week that the central bank expects the commodity rally to ease. Hence, the Fed is keeping its target for interest rates "relatively low" because of "expectation that the prices of oil and other commodities would ultimately stabilize, in part as a result of slowing global growth," Bernanke was quoted as saying on Aug. 22 at the Kansas City Fed annual conference in Jackson Hole, Wyoming.

If this were to occur, it would do wonders for the Indonesian economy, bringing an end to what many earlier thought was an era of stagflation, marked by exorbitant oil and food prices amid an economic slowdown.

If oil prices were to reach $200 per barrel, for example, skyrocketing commodity prices could potentially damage the government's budget deficit, and create a fragile political condition, particularly in a period leading up to the 2009 elections.

When oil prices reached nearly $150 per barrel, people around the world, including many Indonesians, were already complaining about expensive food prices as many commodities, including corn and CPO, had by then started being utilized as biofuels.

The Food and Agriculture Organization (FAO) even stated that a food crisis was unfolding globally, and estimated that the surging food prices may have added 50 million people to the starving population.

Indonesia should count its blessings that commodity prices have reversed and that the prediction has was incorrect.

On the Jakarta stock market, based on our calculation, investors, whether rightly or wrongly, are already pricing in CPO at $700 per ton for 2009 to value Indonesian CPO counters like Astra Agro, London Sumatra and Bakrie Sumatra Plantations.

This, however, is not far off from the current three-month CPO forward price of $768 per ton.

If commodity prices could stay down, inflation will come off allowing for interest rates to come down in the second quarter of 2009. This would be good for sentiment on the stock market in general, although commodity-related counters could underperform.

However, over the longer-run, we believe massive population growth will continue to plague food sufficiency. The world's population has grown at a rate of 1.2 percent over the last 10 years.

On the other hand, land availability for agriculture and plantations is diminishing every year. According to FAO, agriculture areas are declining by five to 10 square meters per hectare every year due to many factors.

More areas are being converted into houses or industries. Even though land availability is still abundant in Central Asia and Africa, the cost to build such areas for plantations is expensive. Fertilizers have become more expensive as the prices of raw materials, including natural gas, are also increasing.

To paint a bleaker picture of the connection between population growth and food availability, the U.S. Census Bureau International Database Division estimated based on its current growth trajectory that the world's population will reach nearly nine billion people in 2042.

In line with this situation, FAO estimates that the world's food supply will double in the same period.

In addition, as global climate changes are happening around the world, agriculture production will be affected. According to Indonesian oil palm plantation companies, it is becoming more difficult nowadays to make weather predictions needed for drawing up plans on planting and harvesting.

Taking the weather into account is crucial in making decisions on when to plant seeds, when to apply fertilizer and in what volume and estimating harvest time. In summary, climate change will have a more uncertain effect on food production as it is generally accepted that population growth increase or at least maintain food demand.

Therefore, it is imperative for countries around the world to make every effort to control their respective rates of population growth, place restrictions on the conversion of agriculture areas into houses/industries and continue to develop the agriculture sector by increasing planting and implementing better technology to increase productivity.

If not, the era of cheap food prices will not be revisited and we will continue to see record breaking soft commodity prices.

The writer is a research analyst at PT Bahana Securities



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