Palm oil surged to a three-month high on expectations that an increase in the biodiesel mandate in Malaysia and the biggest monthly rally in soybeans since 2012 will boost demand for the world's most used cooking oil.
Futures climbed as much as 1.5 percent to 2,340 ringgit ($706) a ton on Bursa Malaysia Derivatives, the highest level for a most-active contract since July 11. Prices were at 2,338 ringgit by 4:27 p.m. local time. A close at 2,315 ringgit would be 20 percent more than the 1,929 ringgit settlement on Aug. 29, meeting the common definition of a bull market.
Palm rallied from a five-year low as Indonesia and Malaysia scrapped export taxes to lure buyers and trim inventories amid a global glut in cooking oils. Soybeans rose 15 percent last month as rain slowed harvesting in the U.S. and planting was delayed in Brazil. Palm may jump to 2,500 ringgit by March as output drops, says Dorab Mistry, director at Godrej International Ltd. Malaysia last week said it would start the B7 biodiesel program from November which will boost the use of palm biodiesel.
"Production has most likely peaked," David Ng, a derivatives specialist at Phillip Futures Sdn. in Kuala Lumpur, said by phone. "With lower production and with the government policy on B7 in place, we're most likely to see inventory for this year to be controlled," he said, referring to the plan under which 7 percent palm biodiesel will be blended with petroleum diesel.
Reserves in Malaysia climbed to 2.09 million tons in September, the highest since March 2013, its palm oil board estimates, while Indonesia's stockpiles dropped to 2.2 million tons from 2.5 million tons in August, according to a Bloomberg survey. Malaysia produced an all-time high of 2.03 million tons in August, board data show.
Futures slumped to 1,914 ringgit on Sept. 2, the lowest since March 2009, after falling into a bear market in July. The plunge prompted Malaysia to extend duty-free exports of crude palm oil from September to the end of the year. Indonesia also cut taxes on most exports to zero last month. The two countries account for about 86 percent of global production, US Department of Agriculture estimates.
The rally in soybeans, crushed to make an alternative oil for use in food and fuel, is boosting demand for palm oil, Ivy Ng, an analyst at CIMB Investment Bank Bhd., said by phone in Kuala Lumpur. Dry weather in parts of Indonesia now and earlier this year may curb supplies and support prices, she said.
"Supply of palm oil may not be so strong as we head toward the later part of the year, because the peak production season appears to have ended," Ng said. "People are bullish on that front -- less supply and maybe demand is picking up a bit."
Palm may extend its rally as production may decline and reduce inventories, said Mistry, who's traded edible oils for more than three decades. Reserves in Malaysia may have peaked by end October and will decline through the first half of 2015, he said on Oct. 29.
Gains may be capped as the soybean rally, partly driven by the jump in oilseed-meal prices, may end as the U.S. harvest progresses, and rains forecast for Brazil aid planting, according to Wayne Gordon, an analyst at UBS AG in Singapore.
"As the U.S. harvest translates to crushing, and crushing translates to meal supply, the meal market is just going to have the rug pulled out from under it," said Gordon. "I'm still bearish on the meal market."
Soybean-meal prices surged 30 percent last month in Chicago, the most since July 1974, as meat prices close to record highs spurred feed demand and shipping delays tightened supplies from Midwest processors. That pushed soybean oil prices 7.5 percent higher in October, the most since February. The oil's premium to palm averaged about $86 a ton this year from $244 in 2013, data compiled by Bloomberg show.