By Dorab Mistry
I have had a very good run over the last 30 months with each of my crude palm oil price forecasts coming true. The last one made 90 days ago for palm oil prices to reach 4000 ringgits by the end of June very nearly verified but missed its target narrowly.

However, I must confess that my medium term forecast for CPO prices to reach 4500 Ringgits by February 2009 was over-optimistic and that I got the market wrong. The only way we can get to 4500 Ringgits by February 2009 is if we immediately run into an El Nino situation or if Nymex WTI crude oil prices flare up to beyond US$ 150 per barrel or if the Ringgit collapses. Since neither of these possibilities is very likely,

I must say today that my forecast for CPO to reach 4500 Ringgits by February 2009 stands abandoned. At this point I would also like to congratulate my erudite and distinguished friend Dr James Fry of LMC International in Oxford who correctly predicted the sharp drop in vegetable oil prices. The case for attending conferences and listening to analysts with differing opinions has never been stronger. The importance of biofuel demand will become obvious more and more as this market progresses over the next several months. I shall first make some remarks about the happenings in the market during the last 90 days.

The lull before the storm
During June, the level of transactions in our market dropped sharply. It turned out to be the lull before the storm! Our market has been affected by the big macro factors such as:

The turn in the fortunes of the US Dollar, the decline in the price of energy, the dramatic change in sentiment towards energy, the deteriorating outlook for economic growth in the G8 countries as well as in the BRIC economies and

Finally, the approach of the hedge fund community towards commodities. Those of you who attended or read my paper at POC 2008 on 27th February in KL will recall I had highlighted the role of funds and particularly the role of Index Funds in boosting commodity prices.

Signs of Demand Destruction
During the month of June, we could discern signs of “Demand Destruction “as a result of high prices. I believe the strong price rises of the first quarter of 2008 finally began to meet resistance in the second quarter and got reflected in the volume of business transactions during the month of June. We saw strong evidence of this in the case of sunflower oil and soya oil. The palm market was the quickest to take note and palm soon sank to a wide discount to its competitor and that has kept palm export volumes at a high level.

Almost Ideal Weather
Overall in 2008, after the second half of June, we have been blessed with almost ideal weather in all parts of the world. For the first time in recent years, my survey of growing conditions in the 10 major regions of the world did not give me a single cause for concern. The problems of wet conditions in the USA got resolved in the month of June itself. As history has taught us, problems in the early part of the season are the least destructive. Problems in the latter part of the season are the most destructive.

We have seen crops get bigger as the northern hemisphere growing season has progressed. We have been most pleasantly surprised by yields in the EU and the size of expansion in Ukraine and in SW Russia. Above all, the expansion has come in high oil bearing seeds – rapeseed and sunseed.

Palm production has also benefitted from an extension of the High Cycle. My earlier estimate was that the High Cycle would come to an end anytime between June and September this year. It appears that the cycle will stretch to the very end of this window and perhaps even stretch to October and November.

Estimates of CPO production in Malaysia for calendar year 2008 have been revised to 17.4 million tonnes and I shall not be surprised if this estimate is comfortably exceeded. Similarly Indonesian CPO production is likely to comfortably exceed 19 million tonnes. I am told that very generous use of fertilisers, given the high prices of CPO, has done its job together with almost ideal weather.

The Case for Biofuels
Only a few months ago it had become fashionable to blame Biofuels for all the problems of mankind. Exuberant do-gooders were on the verge of saying that Thomas Malthus would be proved right and that mankind would fail in its endeavours to feed the growing population of the world.

How wrong they were. I have always held the view that we should never under-estimate mankind’s ability to innovate and to adjust and to find resourceful solutions to the most intractable of problems. Just when people thought arable land was in short supply and that North and South America were approaching the limits of expansion, Eastern Europe has emerged as a location of enormous potential. Ukraine, South West Russia and parts of Eastern Europe hold out great promise for new investment and bumper profits in agriculture.

The case for biofuels is as obvious as the case for Alternative and Renewable Energy. We all seem to forget that the history of mineral oil dates back only 150 years. There are finite reserves of mineral oil and unfortunately most of these are concentrated in the hands of a cartel which does not hesitate to use its muscle to boost prices. Biofuels and alternative energy sources like Wind and Solar must be encouraged and expanded. Let us not waste time arguing over the pros and cons of biofuels.

Let us instead contemplate how we would be vulnerable without the added security and comfort of biofuels.
In July 2008, the International Energy Agency forecast that world biofuel production in 2008 will be down slightly at 1.35 million barrels per day, compared with its May2008 forecast of 1.5 million barrels per day ( mbpd ). I have no doubt the current easing in prices will once again hoist the figure to 1.5 mbpd. In 2007 it was 1.06 mpbd. By 2013, the IEA estimates production of biofuels will be 1.95 mbpd. As the IEA says, “ Biofuels have become a substantial part of faltering non-OPEC supply growth, contributing around 50 percent of incremental supply in the 2008-2013 period ”.

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