Moving forward, production is expected to increase in the coming months as the palm oil industry is about to enter into its usual peak production period of July to October. — AFP photo
KUCHING: Malaysia’s palm oil production level in July was lower by 5.2 per cent month on month (m-o-m) to 1.52 million metric tonnes (MT) which was the weakest monthly level observed since April 2021 despite better weather condition.
MIDF Amanah Investment Bank Bhd (MIDF Research) opine that lower production was on the back of lower workforce and tight standard operating procedure (SOP) requirements.
“To note, the lack of labour will lead to delays in the harvesting activities which will impact the quality of fruit bunches. Geographically, the lower output mainly weighed down by lower contribution from the state of Terengganu, Kelantan, Johor and Sabah,” it said in its review yesterday.
“Moving forward, we expect production to increase in the coming months as the palm oil industry is about to enter into its usual peak production period of July to October.
“Nonetheless, looking at the current vaccination rate which has accelerated robustly and has reached 25.8m vaccine doses cumulatively (as at August 11, 2021), we believe that the government will be able to open the border in 2022.
“As a result, local plantation players will be able to bring back foreign workers which are expected to aid with the labour shortage issue.”
On top of that, in the longer term, MIDF Research expect production to increase significantly as smallholders would be more aggressive in applying fertiliser during periods of high crude palm oil (CPO) prices and current better economic conditions.
Supply tightness situation provided some comfort to CPO price. In July, average CPO spot price increased by 9.9 per cent m-o-m to RM4,207.95 per M from RM3,828.84 in the previous month.
The highest CPO price recorded in July was on July 27, 2021, at RM4,662.50 per MT and this is primarily in view of tight inventory level despite, and decrease in production.
“We believe that tight stock level was mainly impacted by the supply side rather than export demand,” MIDF Research continued. “We believe that CPO has already reached its peak in the first half of 2021.
“Moving forward, we foresee that tight inventory level to continue to add upward pressure on CPO price movement. While we expect the CPO price will soften in 2H21, we opine it would not be significant in view of unresolved labour shortages due to border closure and slow production growth.”
The research firm believed the palm oil supply tightness situation would likely remain at least until the third quarter of financial year 2021 (3QFY21).
On the demand front, low palm oil inventories in India and China will also encourage the replenishing activities.
On another note, price-wise, MIDF Research anticipated for CPO prices to soften in 2H21 as it expect production to recover due to better weather condition. In terms of weather outlook, it is worth noting that the Niño 3.4 region has trended warmer.
“The drier weather and lack of heavy rains will boost local palm oil production as it will help to increase the productivity of harvest activities. Nonetheless, we opine that the palm oil price would not ease drastically or go below RM2,500 level.
“All factors considered, we maintain our positive stance on plantation sector with 2021 CPO average price forecast of RM3,200 per MT.”