Regional Plantation Biofuels are back! - DBS Vickers

• Speakers at 2011 Palm Oil Conference were bearish for 2H11, but expect FY11 prices to average higher than our forecast
• Factors to watch: US RFS2, acreage battle, weather, funds participation, and macros
• We continue to expect near term CPO price strength, followed by weaker 2H11 – reviewing FY11-13F numbers with upside bias
• No change to top picks: Sampoerna Agro, Genting Plantations, Sime Darby, IndoAgri and Wilmar


CY11 prices may average RM3,350. Most of the speakers at the 2011 Palm Oil Conference indicated that near term palm oil prices will be strong, followed by softening in 2H11. The exception was Mr. Dorab Mistry, who expects prices to strengthen in 2HCY11 and retest RM3,600 – RM4,000 levels, led by strong soybean oil prices. In a hard landing scenario, Dr. James Fry of LMC International also expects prices to strengthen to RM4,300 by Sep11, followed by a steep drop to RM2,250 by Dec11.

Increased biofuel mandate at the centre of attention. Reasons for the expectation of strong prices ranged from late-stage El-Nino impact on palm oil supply, Indonesian export tax, extension of US biodiesel tax credit, RFS2, acreage shift away from oilseeds, global demand shifts and strong crude oil prices. Arguments for lower prices in 2H11 ranged from lower demand from China to lack of political will to increase RFS requirement after 2012 given the large US budget deficit. Mr. Thomas Mielke of Oil World believes current biofuel mandates are too high, and that they key issue going forward will be meeting food demand, given recent consumer protests.

CPO price assumptions under review. Taking into account a lagged effect of 2009 El Nino and continued shortage of labour in Malaysia , our 2011 Malaysian CPO volume projection of 18.2m MT now looks optimistic. On the other hand, our soybean production forecast of 70.4m MT is now considered too low, and that of Argentina (50m MT) is probably on the high side. We are reviewing these assumptions and look to revise our FY11-12F CPO price assumptions with a slight upside bias.

No change to our recommendations, as we believe that at current prices some planters have been significantly oversold given the tightness in soybean oil supplies. Our top picks are Sampoerna Agro, Genting Plantations, Sime Darby, IndoAgri and Wilmar.