Palm oil extended its rally to a two-week high after Malaysia, the world\u2019s second-top producer of the commodity, reported that stockpiles in January dropped more than expected due to lower production. As a result, palm oil prices have gained 2.12% over the past week to a two-week high of 3,959 Malaysian ringgit\/metric ton (MYR\/MT). Malaysia\u2019s inventory of palm oil as of end-January dropped by 11.8% from December levels to 2.0-Million metric tons (MT), extending a four-month decline as production starts to show the impact of dry conditions brought by the El Ni\u00f1o weather phenomenon. Demand has not fallen as much as production, based on Malaysia\u2019s export data, and stockpiles are expected to shrink further below 2.0-Million MT in the coming months.<\/p>\n\n\n\n
Food manufacturers MONDE and DNL both count palm oil as a significant input in their production. To a certain extent, both companies have some leeway to substitute locally-produced coconut oil for palm oil, but as a substitute product, the price of coconut oil would eventually track palm oil prices as substitute demand rises. <\/p>\n\n\n\n
The impact on MONDE and DNL would not be immediately felt as both would keep
inventories of palm oil and would likely not need to make purchases on a daily or even weekly basis. However, with palm oil prices expected to remain elevated in the coming months, both companies will likely feel some cost pressures. <\/p>\n\n\n\n
As such, we would recommend a hold on both MONDE and DNL with a Target Price of P10.54 and P7.97 respectively.<\/p>\n\n\n\n