Palm oil stockholders are cursing the skies, perhaps literally. Phenomenally good and plantation‐ideal weather over the past couple of years has had planters reaping bountiful harvests, although such high supply has also led to mounting stockpiles and consequently depressed crude oil prices.

Plantation firms listed here are feeling the effects. In the first quarter of the year, their report cards, though not marked with red,showed declining earnings.Only two out of the eight(Wilmar International and First Resources) reported higher profits. Invariably, profit margins were thinner, with the squeeze coming from lower selling prices of crude palm oil (CPO) and palm products.

Palm stocks have also fallen across the board against a Straits Times Index (STI)that has largely held steady from the start of the year. Brokers are neutral at best, if not underweight, on the sector, with "buy" calls on a few more promising stocks. First Resources was the best‐performing of the lot, thanks to its prescient hedging and forward sales at above‐average CPO selling prices in Q1. Whether it is luck is anyone's guess. What is perhaps more certain is that for the rest of the year, First Resources won't be able to sustain its profit uptrend from hedging alone, given that a lot of its forward sales from last year have since been depleted.Hedging is also less likely to lift the earnings of other palm oil players.

Recently implemented lower Indonesian export tax for refined products over crude products gives plantation firms more reason to go deeper downstream. Pity though that margins are fattest in the upstream business. Downstream businesses have much thinner margins in comparison, so any cushion they afford profit
margin erosions is slight at best.

To be sure, palm oil players cannot completely escape the impact of weak CPO prices unscathed; at best, they can only try to minimise the effect on their bottom line.

Source: AmFraser