DBS Palm Oil: Labour woes, bullish views

·Speakers at the 2010 Palm Oil Conference were generally bullish, with few exceptions

·Labour shortage in Malaysia could worsen, might cap FFB harvest despite peak season

·February data from MPOB suggests near-term price strength is intact

·We continue to expect weak prices in 2Q10, and recommend to take profit on near-term strength.

2010 prices at RM2,400-3,300/ton. Speakers at the 2010 Palm Oil Conference mostly indicated that palm oil prices were likely to remain flat in the near term. However with the exception of Dr. James Fry, the speakers expect prices to strengthen in 2HCY10 with upper limit of RM3,300. Reasons for the strong price expectation ranged from El-Nino impact on palm oil supply, increased biodiesel usage, lower soybean crushing due to difficulty in disposing soybean meal, and increased world dependency on palm oil.

But trouble is brewing closer to home. During the conference, we also engaged several Malaysian planters on the issue of Indonesian labour shortage, which seems more serious than initially thought. In addition to competition from Indonesian planters, both governments have tightened labour movements. We do not see a near-term solution to this problem, and if it drags on, could lead to losses from unharvested FFB during the peak-harvesting season.

Near-term price strength intact. MPOB data released yesterday pointed to a sharp 12.4% m-o-m drop in February production, which caused inventory to fall to 1.79m MT despite a 11.6% drop in exports. These numbers were significantly below expectations, and next month’s inventory level could drop further if production fails to pick up and exports rebounds

No change to recommendations. We are maintaining our view that palm oil prices would face downside pressure in 2QCY10, mainly on expectations of lower soybean oil prices. We have already lowered Indonesian FFB yield assumptions due to less fertilizer application in 1H09, but will be reviewing Malaysian yield assumptions to factor in the recent dry weather and labour shortage problems if conditions are unchanged this month.