Palm oil futures plunged as oil market softness added to a caution from a leading analyst that values were heading for two-years lows, depressed by a surge in vegetable oil supplies.

Kuala Lumpur palm oil futures for December slumped by 8.2% at one point to 3,431 ringgit a tonne, the weakest since June last year for a benchmark contract, before recovering some ground to stand at 3,547 ringgit a tonne in late deals, down 5.1% for the session.

The tumble came amid fresh softness in oil prices – to which vegetable oil markets are linked thanks to their use in making biofuels – as a round of interest rate hikes promotes global recession worries.

Brent crude, having dipped by 4.8% in the last session, shed a further 1.9% in early trading on Monday, to touch an eight-month low of $84.51 a barrel.

‘Firing on all cylinders’

However, the palm oil price slump was further attributed to a forecast by respected analyst Dorab Mistry that futures were on course to “fall to 2,500 ringgit” per tonne by the end of December, a level not seen since July 2020.

Mr Mistry forecast that while world demand for vegetable oils would expand by 3.00m tonnes in 2022-23, production will increase by 6.50m tonnes, helped by recoveries in Canada’s canola crop and South American soy production from dryness-affected levels.

In palm oil itself, output growth will accelerate to 3.0m tonnes – from 1.0m tonnes in 2021-22 as ends on Friday – as top producer Indonesia “is firing on all cylinders”, said Mr Mistry, director at India’s Godrej International.

Expansion in actual vegetable oil supplies will be even greater, given the back-up of palm oil stocks in Indonesia, thanks to a temporary export ban, and Ukraine, thanks to the disruption caused by Russia’s invasion.

Backlog effect

“In actual fact, the surplus is going to be much more” than simply subtracting 2022-23 consumption from production would suggest, “because all the supply that was blocked in 2021-22 in Ukraine, in Indonesia is all going to come back into the market,” Mr Mistry told the Globoil conference.

“That is why I am more bearish than most analysts.

“Production in most producing countries is recovering strong, and we have seen demand destruction due to very high prices.”

Why 2,500 ringgit?

Mr Mistry – who in June 8 forecast a tumble in palm oil prices, the day before the start of a five-week slump which saw Kuala Lumpur futures slump by 45% – added that his forecast of a price floor at 2,500 ringgit a tonne reflected ideas that this was the cost of output for many producers.

Citing an estimate from IOI Group, one of Malaysia’s top palm groups, of a cost of production of 2,100 ringgit a tonne, Mr Mistry said that rivals would be facing higher figures.

“In a bear market prices, usually reverse to the cost of production of inefficient producers.

“The function of the market is to put those inefficient producers out of business.

“I think 2,500 ringgit is a good target, a good support level for prices.”

Other oilseeds

The slide in palm oil futures was reflected somewhat in related markets too, with Agritel noting it “could significantly affect rapeseed prices” in Paris, although oilseed investors also drew comfort from relative stability in Chicago soybeans, the sector leader.

Paris rapeseed futures for November stood 2.1% lower at E594.25 a tonne in late morning trade.

Winnipeg canola futures for November shed 0.9% to Can$811.00 a tonne.

In Chicago, the November soybean contract stood 0.4% lower at $14.20 ¾ a bushel.