AmWatch - Plantation Sector : Taking a look at the relationship between soy and CPO NEUTRAL, 30 Apr 2015

SECTOR FOCUS OF THE DAY

Plantation Sector : Taking a look at the relationship between soy and CPO            NEUTRAL

In this report, we take a look at the price discount between soybean oil and CPO. We find that the price disparity between the two commodities is mainly influenced by supply factors. Also, the price discount between soybean oil and CPO has been declining since 2008.

Currently, the price discount between the two commodities is 15.8% or US$110/tonne compared with 9.9% in 2014 and five-year average of 13.9%. The price discount would have been larger if not for the recent appreciation of the Ringgit against the USD. The price discount has widened since March 2015 due to expectations of a surge in palm oil production in the coming months.

Price discount between soybean oil and CPO has shrunk from an average of 26.1% in 2008 to 9.9% 2014. Soybean oil prices have fallen by 38.0% from 2013 to 2014 while CPO prices have slid by only 3.5%. We believe that CPO prices have held up better than soybean oil due to its relatively weaker production levels. CPO production in Malaysia and Indonesia were affected by dry weather during certain months in 2014. In contrast, US soybean production hit record levels in 2014 on the back of favourable weather.  

Going forward, we reckon that CPO prices would continue to take their lead from soybean prices as long as there are no major disruptions in weather. We maintain NEUTRAL on the sector. Although we do not have any BUY recommendation, we would recommend IJM Plantations (IJMP) for exposure to the plantation sector. Among the larger caps, we like Kuala Lumpur Kepong (KLK). We like both companies for their young oil palm trees, solid balance sheets, low production costs and purer exposure to CPO prices. 

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