By Patrick Sparks, Global Risk Management Inc.

Palm oil production in Malaysia continues to be plagued by labor shortages resulting from COVID travel restrictions as well as excessive rains in many of the growing regions. Production in February was just over 1.1 million tonnes, a 5 year low. This brought cumulative 20/21 production to date to 6.78 MMT, down 5% from last year and the lowest Oct to Feb total since the 10/11 season. Harvesting oil palm is labor intensive and companies have had difficulties securing adequate labor for timely harvest. Adding to the problems has been heavy rainfall that is also working to curb yields.

The production woes have kept palm oil stocks in Malaysia at tight levels despite exports the last 2 months being very low. In fact, January and February Malaysian palm oil exports were the lowest monthly total since 2007, yet stocks in February remained at historically low levels and are 23% below last year.

After seeing the supportive February data, palm oil futures pushed to new all-time highs on the nearby contract, above 4,200 Ringgit. Exaggerating the bullish palm oil fundamentals is that nearly every major global vegoil is in a similar tight supply situation from soy to rape/canola to sun. Global vegoil stocks to use ratios are record tight.

Moving forward, palm oil production is expected to start to increase as cyclically it usually does, working off of seasonal lows in January/February and peaking between September and November. This would be the first step in trying to rebuild stocks but that build may be limited by demand. With all other major global vegoil prices high, palm is likely to keep its steep discount to competing oils, supporting demand. Major vegoil importers India and China have strong demand stories. This all points to continued support at least short term for global vegoils, which has been one of the hottest commodity markets since the middle of last year.

Commodity trading is not suitable for all investors. There is an inherent risk of loss associated with trading commodity futures and options on futures contracts, even when used for hedging purposes. Only risk capital should be used when investing in the markets. Past performance is not indicative of future results.