UOB Kay Hian has raised its 2024 forecast for crude palm oil (CPO) average selling price (ASP) to RM4,200 per tonne from RM4,000, on lower production in both Malaysia and Indonesia.

In a note on Tuesday (July 25), the research outfit said the revision was prompted by its recent visits and channel checks, which revealed that the expected peak production typically seen in the second half of 2023 (2H2023) is not going to be strong, as older trees’ yields have yet to reach their full potential, while some young mature areas are not meeting production targets.

It cut global palm oil production forecast by 2% after trimming Indonesia’s 2023 production by 300,000 tonnes, and Malaysia’s by 800,000 tonnes, which is expected to lead to a supply tightness that extends into 2024. There will also be lower carry forward inventory from the end of 2023.

“El Nino is not here yet and most of the producing regions are still receiving decent rainfall. Should any prolonged dryness occur, 2024 supplies could tighten further as CPO production could be flat or lower year-on-year,” UOB Kay Hian said.

The firm added that heat and dryness continue to pose a risk to the North American planting season, which could lead to downward revisions of soybean production in the US and canola production in Canada for the 2023/24 season.

“The price of soybean complexes has strengthened by 18% since the US Department of Agriculture trimmed the estimated planted areas for 2023/24 in June 2023. Heat and dryness could lead to lower yields, which would translate into lower production from North America,” UOB Kay Hian said.

This is another positive for global oilseed and vegoil prices, it said, adding it is maintaining its 2023 CPO price assumption at RM4,000 per tonne.

“Should a strong El Nino occur in 2H2023, we see more upside potential for 2024 CPO prices as we expect palm oil output growth to be negative y-o-y,” the firm said.

As such, it upgraded the plantation sector to “overweight” — driven by expectation that the sector would see stronger share price performance, along with the expected CPO price uptrend in the third quarter of 2023 to the first half of 2024.

It also upgraded both Kuala Lumpur Kepong Bhd and Sime Darby Plantation Bhd to “buy” from “hold”, to join two other “buy” call planters: IOI Corp Bhd and Hap Seng Plantation Bhd.