LAUNCESTON, Australia, Oct 2 (Reuters) - Crude palm oil prices have not only slumped to their lowest in more than two years, they are also at the widest discount to soybean oil since the 2008 global financial crisis.
While prices for both vegetable oils may continue to drop amid sufficient supplies and a potential softening in demand as the world economy struggles, it is more than likely that the spread will narrow in coming months.
Benchmark crude palm oil futures traded in Malaysia FCPOc3 were around 2,400 ringgit ($787) a tonne on Tuesday, the lowest since July 2010.
More importantly, the gap between palm oil and soybean oil traded in Chicago was around $329 a tonne, the widest since October 2008, when prices plummeted during the global recession.
Palm oil and soybean oil are largely fungible, although it obviously takes several months for consumers to switch from the one to other.
The biggest spread between the two vegoils was just at the start of the global financial crisis, when it reached $402 a tonne in early July 2008.
As palm oil prices plunged 64 percent from July to October 2008, the gap between them and Chicago soy oil futures remained wide, however, it started to narrow once both contracts had bottomed out.
As palm oil recovered, it did so at a faster pace than soy oil, and by mid-May in 2009 the premium of soy oil was down to just $87 a tonne.
This narrower difference was maintained until February last year, when it started widening again as prices for both initially traded sideways before dropping.
It seems that for the past four years there has been a fairly consistent pattern that the spread widens when prices for both vegoils are declining, and narrows when they are rising.
But before placing a bet on the spread narrowing, one would have to have a fair degree of confidence that palm oil prices have bottomed out.
There is a seasonality to palm oil prices, with the low point normally being in October.
High inventories in Asian producers and softer Chicago soybean prices, given a record pace of U.S. harvest and evidence of better-than-expected yields, have also hurt palm oil prices.
But the big premium being commanded by soy oil will spur buyers to switch to palm oil, which should at least stop prices from falling much further.
It's also possible that palm oil prices have now adjusted after getting too high on the back of fears earlier in the year of poor soybean harvests due to a historic U.S. drought and also of an El Nino weather event hurting palm oil production in Southeast Asia.
It now appears that the El Nino event currently developing may be weak, which would limit the impact on palm oil output.
El Nino is the phenomenon of the warming of sea-surface temperatures in the Pacific, which is associated with drier weather in Southeast Asia and Australia and wetter-than-normal conditions in parts of South and North America.
"A weak El Nino may develop in September and October and last until the northern hemisphere winter," the World Meteorological Organization said in a statement Sept. 25.
Palm oil futures more normally trade in backwardation, but are currently in contango, where prompt-delivery contracts are cheaper than those for later delivery.
This shows the market is still concerned about lower supplies in the first half of next year, a fear that may be overblown given the likelihood of a mild El Nino and indications that soy oil stocks will be better than expected.
But it also may reflect the view that the current sell-off in palm oil has been overdone and futures will recover in the next few months, and narrow the gap to soy oil futures.
