If you look at the STI Index stocks from January to July 2009, you will notice that plantation stocks or stocks with palm oil/plantation exposure dominated the top 5 gainers.  Jardine C&C was higher by 88.3% followed by Wilmar higher by 84.3% and Golden Agri higher by 56.3%.   These price gains were the result of a sharp rise in the price of palm oil which was then attributed to lower than expected supplies, lower than expected stock levels and expectations that demand for palm oil would rise because of the recovery in the global economy inline with firmer crude oil prices.

Crude palm oil price chart

Copper price chart

Aluminium price chart

Crude oil price chart (Brent)

Gold price chart

The rally in commodity prices since March 2009 can be attributed to the following factors:

a) weakness in the US$ - commodities were seen as a natural hedge against a weak US$

b) recovery in the global economy, ie an increase in demand and according to some observers, China building up stocks at cheap prices

c) for specific commodities such as palm oil, lower than expected supply from bad weather from lower than expected yields.

What is interesting in the charts above is the magnitude of the rise was sharpest in percentage terms for palm oil and copper.  The rise and sustained price of Gold is not surprising given that in the current crisis, it is probably viewed as the most defensive investment/asset class.  For the others, the gains may be excessive.

Palm oil prices have since started to fall - this has been partly attributed to the failure of crude oil to breach US$70 per barrell.  I have also read reports in July 2009 that mention a bumper palm oil harvests.   Palm oil futures tumbled as much as 3.4 per cent today on the Malaysia Derivatives Exchange, adding onto last week’s 6.2 per cent decline, on concern production will increase in the second half.  Stockpiles in Malaysia, the second largest producer of palm oil, expanded for the first time in six months in May as output surged 8.5 per cent, the biggest on-month increase in a year.

Investors are now awaiting the June production figures, inventory and export data which are expected to be released by Malaysian Palm Oil Board on July 10, 2009.  If these confirm the growing supply picture with demand being relatively weak......we could be looking at further weakness in the palm oil price.  There is some support at M$2000 per tonne but strong support can be found at M$1750 per tonne.   Dont forget to keep your eye on the July 10, 2009 data if you currently own palm oil stocks.