Forecasts of a 25% hike in palm oil prices could support increased imports of soybean into China as farmers take advantage of the ‘crush margin’ to produce soya oil.

According to a report in Reuters, one of the largest palm oil producers Sime Darby Bhd. forecasts that palm oil prices may rise by almost one-quarter over the next eight months. Malaysia, the second biggest producer after Indonesia has announced a plan to cut taxes on exports while also abolishing the duty-free shipment quota from the start of 2013. These measures should help to reduce inventories, supporting higher palm oil prices.

Palm oil and soya oil are substitutes for each other, used in the production of cooking oils, margarine etc. Palm oil prices have slumped by almost a quarter since the start of 2012, close to their lowest level in three years. In contrast soya oil prices have fallen by 4% since the start of 2012, caught between the decline in palm oil prices on the one hand and the surge (up 28%) in soybean prices on the other.

Chinese buyers have been importing soybean in record volumes, despite the high prices turning it into meal for its pigs and chickens. With the Chinese government currently supporting an expansion in pig production to help tame consumer prices, meal prices have increased by 43% since the the start of 2012.

The crushing of soybeans produces soya oil as a by-product. If palm oil prices rise by 25%, soya oil prices are also likely to rise. This will increase costs for consumers of cooking oil and margarine but will also help to support increased demand from China for soybeans with higher ‘crush’ margins.