Plantation - USDA WASDE report bearish to CPO prices

In its latest World Agricultural Supply and Demand Estimates (WASDE) report released on 8th of March 2013, USDA has unexpectedly raised its global stockpile estimate for soybean to 60.21m mt or 2% ahead of the consensus forecast of 59.31m mt. As a result, its soybean oil inventory was also raised to 3.34m mt from its Feb-13 estimate of 3.32m mt. We gather that USDA has lowered its soybean oil price forecast to the range of 48.5-51.5 US cents per pound (Feb estimate: 49.5-52.5 US cents per pound). By itself, the news of the higher soybean oil inventory should be slightly negative to CPO prices as both commodities are commonly used as the substitute for each other (causing the correlation between CPO and soybean oil prices to be very high). Despite the short term weakness seen, the CPO price downside should be limited due to the expected decline in Malaysia’s palm oil stocks by 4% MoM to 2.48m mt in Feb-13. Note that MPOB is expected to release its monthly inventory data this afternoon. We reiterate an UNDERWEIGHT rating on the sector given that the consensus is still estimating an average 2013 CPO price of RM2950/mt (against ours at RM2500/mt). This should lead to another earnings disappointment in the next earnings season in May-2013. We are maintaining UNDERPERFORM calls on SIME (TP: RM8.82), IOICORP (TP: RM4.34), KLK (TP: RM19.30), FGVH (TP: RM4.00), GENP (TP: RM7.60), IJMP (TP: RM2.75) and TAANN (TP: RM2.84) due to the low CPO price outlook. Our MARKET PERFORM calls are also retained on TSH (TP: RM2.00) and UMCCA (TP: RM6.70). Our only OUTPERFORM call is on PPB (TP: RM15.00) as we expect it to benefit from Wilmar’s earnings recovery (good prospect seen in both its soybean crushing and palm oil downstream divisions).

USDA raises its 2012/13 season global soybean oil inventory estimate by 1% to 3.34m mt. In its latest WASDE report released on 8th of Mar 2013, USDA has unexpectedly raised its global stockpile estimate for soybean to 60.21m mt or 2% ahead of the consensus forecast of 59.31m mt. As a result, the soybean oil inventory was also raised to 3.34m mt from Feb-13 estimate of 3.32m mt. We gather that the quantum of the demand estimate reduction of 0.27m mt was greater than production estimate reduction of 0.23m mt. USDA has also lowered its soybean oil price forecast to the range of 48.5-51.5 US cents per pound (Feb estimate: 49.5-52.5 US cents per pound).

Soybean oil demand estimate cut by 0.27m mt possibly due to the slower demand from the biodiesel industry due to the decline in the WTI crude oil price. Given that the WTI crude oil price has declined from US$98/barrel in early-Feb to about US$92/barrel recently, the profitability of US biodiesel producers may have been affected. We think that this could be the reason for USDA to lower its demand estimate for global soybean oil.

Soybean oil supply estimate trimmed by 0.23m mt due to the lower Argentina soybean production outlook. We gather that USDA has lowered its Argentina soybean production to 51.5m mt from Feb-13 estimate of 53.0m mt. According to USDA, the extended dry period during planting and early crop development has limited plantings and reduced yield prospects for soybean in Argentina. Despite the lower production outlook, Argentina is still expected to produce a bumper soybean crop of 51.5m mt, which would be 28% higher than last year’s 40.1m mt.

Overall impact is slightly negative to CPO prices. By itself, the news of the higher soybean oil inventory should be slightly negative to CPO prices as both commodities are commonly used as the substitute for each other (causing the correlation between CPO and soybean oil prices to be very high). As it is, the soybean oil price has declined slightly by 0.53% to 50.34 US cents per pound on the CBOT market last Friday. Despite the short term weakness seen, the CPO price downside should be limited due to the expected decline in Malaysia’s palm oil stocks by 4% MoM to 2.48m mt in Feb-13. Note that MPOB is expected to release its monthly inventory data this afternoon.

Source: Kenanga