Malaysian palm oil gains from ringgit woes

Malaysian palm oil gains from ringgit woes

KUALA LUMPUR (Reuters): Malaysia's main agriculture export earner, palm oil, has emerged as a big gainer from the Southeast Asian currency turmoil, and analysts yesterday predicted more gains.

Although commodity prices in Malaysia have generally benefited from the ringgit's weakness against the U.S. dollar, palm oil has stood out. A weaker local currency makes exports more competitive.

Palm oil prices, now trading at 30-month highs, have gained about 38 percent since July when the ringgit, along with other Southeast Asian currencies, started to fall.

"Crude palm oil being a direct substitute to soyoil is the main beneficiary of the weakened ringgit. With both soyoil and palm oil being quoted in U.S. dollar in international market, a drop in the value of the ringgit directly translates to higher prices for the crude palm oil," said a commodity analyst with a local brokerage.

Greg Feldberg, a plantation analyst at ABN-AMRO Hoare Govett, said, "It's pretty clear that companies and traders are paying closer attention to the currency market than they have for a very long time."

ABN-AMRO has raised its 1998 average crude palm oil price forecast by 26 percent last month, from 1,388 ringgit ($416.82) a ton to 1,742 ringgit a ton. "Of the change, 22 percent was due to our revised ringgit forecast for 1988 and only four percent was due to our expectation of a higher palm oil price in U.S. dollar terms," Feldberg said.

Malaysia's benchmark, third month contract on the Kuala Lumpur Commodity Exchange, was quoted at 1,615 ringgit a ton at midday yesterday. The contract hit limit-up of 50 ringgit a ton on Monday.

Analysts said the upward trend was still intact on expectations that the ringgit would remain weak.

A Reuters poll on Monday predicted the ringgit would be at 3.37 ringgit to the dollar by the end of 1997. It was at 3.33 a dollar at 0600 GMT yesterday.

"Palm is driven by currency again and this has attracted a lot of speculation," the local brokerage analyst said. "It is like a casino in the palm oil trading pit."

"Palm oil can easily hit 1,700 to 1,730 ringgit if the ringgit is trading at around 3.37," he said.

Analysts said expected tighter supplies would also support palm oil prices in the long term.

"We expect supply and demand conditions, especially lower yields aggravated by the El Nio weather event, to support the dollar price of palm oil through 1998 and 1999," Feldberg said.

Malaysia's Ministry of Finance said in its annual economic report on Friday that palm oil production in Malaysia is expected to fall by 2.2 percent to 8.8 million tons in 1998 from an estimated 9.0 million tons this year.

Malaysia's "golden crop" is expected to earn 10.7 billion ringgit in 1997, up 13.4 percent from 9.43 billion ringgit earned last year, the ministry said.