KUALA LUMPUR (March 28): Malaysia&rsquo s palm oil production will slump more than previously forecast, as the lingering effects of El Nino curb output in the world&rsquo s second-biggest producer, according to Godrej International Ltd&rsquo s Dorab Mistry.

Production will drop by 2 million metric tons in the year through September, Mistry said in remarks prepared for a conference on Monday in Beijing. That compares with a 1.5 million ton decline predicted earlier this month. Malaysian output will be &ldquo well below&rdquo 19 million tons this calendar year, while it will total 31 million tons in top grower Indonesia, he said.

Palm oil, used in everything from biscuits to lipstick and biofuel, surged to a two-year high this month as the strongest El Nino in two decades hindered growth of fresh fruit bunches in Indonesia and Malaysia, which make up around 86% of world supply. Mistry maintained a forecast for prices to climb to 3,000 ringgit (US$744) a ton. Futures on Bursa Malaysia Derivatives traded at 2,752 ringgit by the midday break, up 11% this year.

&ldquo This El Nino is doing what all big El Ninos do &mdash lowering production and boosting prices,&rdquo said Mistry, who&rsquo s traded palm oil for more than three decades. &ldquo I shall not be surprised if the deficit for first half 2016 as compared with first half 2015 will be in excess of 1 million tons.&rdquo

Falling Stockpiles

Malaysian palm oil stockpiles fell to an eight-month low of 2.17 million tons in February, according to Malaysian Palm Oil Board data. Production slumped to the lowest level since February 2007, the data show. Inventories may drop to 1.5 million tons toward the end of the second quarter, Alan Lim, an analyst at MIDF Amanah Investment Bank Bhd, said in a March 25 report.

&ldquo World stocks will be drawn down dramatically,&rdquo Mistry said, raising his forecast for the gap in incremental supply and demand in 2015-16 to almost a record 4.3 million tons, from almost 4.2 million tons forecast earlier this month. &ldquo We are already seeing this happen in palm oil in Malaysia and will see this soon happen in Indonesia. Stocks in consuming countries like India and China will also thin down.&rdquo

Indonesia&rsquo s biodiesel program is &ldquo working well&rdquo , with about 200,000 tons of biodiesel being produced from palm each month, Mistry said. Indonesian palm oil exports were forecastto fall to a one-year low of 1.95 million tons in February, as the world&rsquo s largest palm grower used more of the commodity in biodiesel.

Soybean oil will continue to take market share from sunflower oil and to some extent palm oil, especially if palm prices narrow their discount to soy, Mistry said. Soybean oil&rsquo s premium over palm was around US$61 a ton, from an average of US$104 over the past year, according to data compiled by  Bloomberg.