CLSA INDO: CPO update - Sharp drop in Dec10 production in Malaysia

Numbers were released yesterday. While many were concerned with the fall in exports by 14.6%, however what is more crucial is the sharp drop in December production of -16%. Fall in production should reasonably support prices at least for the next 2-3 months as more bad news on weather continue to disrupt Soy and palm oil production.

 I highlight 3 key points to take away from the December numbers.  
1. 2010 production declined falling short of even the more conservative industry forecast

·         As we had earlier expected, actual production of 17M mt for the 2010 did not meet MPOB forecasts (17.8M mt) and has even fallen short of the conservative forecasts of Dorab Mistry at 17.2M mt

·         The industry has been in decline for two years in a row and this trend is worrying, but at the same time great for prices!

·         View in the industry is that the first half of 2011 to continue to be soft in terms of production before we see an uptick somewhere in May- June.

·         There are expectations for production in May- June to peak strongly as palm oil production typically show strong growth after a 2-3 year “break” as seen in 2005 and 2008.

2. December production sharply down

·         December production at 1.23M mt is the lowest in recent times led by a decline in Peninsular Malaysia by 19.6% to 647,185 tonnes and Sabah and Sarawak by 10.4% to 585,422 tonnes MoM. Yields are taking a beating with tree stress being one of the possible for the decline.

·         As was highlighted in our previous note The Crude CPO Rally in October, this fall in Dec production is due to the fact that 2010 peak season has been brought forward by 2-3 months which has caused your December figures to really be your February- March harvest in a regular year.

3. Exports were down 14.6% MoM but exports proportion remain strong

·         From previous channel checks we gather that exports slowed at the start of December due to Inflation curbs by China and preference for Soy (as it is more durable in cold weather), but picked up towards  the end of the month due to restocking and pre Chinese New Year purchases. This broadly supports the sharp fall in exports by 14.6% MoM

·         However an interesting chart to look at is the proportion of exports to available supply where only a small drop of 4% MoM is observed, showing that the slow down in exports could also be attributed to slowing production.