Palm olein now trades at a $70 premium to a tonne of Argentine soyoil, triggering concerns that demand will slow and weigh on benchmark palm oil futures that is set to post its worst monthly loss in February in more than a year.
Thomas Mielke, editor of Oil World, said the fading La Nina weather condition in coming weeks will aid the recovery in Malaysian and Indonesian output that has been curbed by heavy rains and floods in early 2011.
The same can be said for the Argentine soy crop that has now experienced favourable rains after a prolonged dry spell owing to the weather condition.
"A discount will emerge soon. Palm oil will then further widen the gap as production yields will recover," Mielke told Reuters by phone ahead of the Bursa Malaysia Palm Oil Conference due on March 7-9.
Mielke, who is based in Hamburg, declined to give projections for the spread between refined palm olein and soyoil, which compete for use in cooking oil, cosmetics and biofuel but said the discount will be tight.
"We are still in a tight supply situation as palm oil production has been down for at least two years and soy crop in South America is still going through some uncertainty. But there will be a recovery," he added.
Traders, however, are expecting palm oil to trade at a discount of $50-$70 a tonne compared to the usual $100-$120 spread.
TAX CUTS FOR BIG IMPORTERS?
Palm oil prices surged to 3,967 ringgit in early February, 12 percent off a 2008 record on floods in Malaysia and in anticipation that big buyers will stockpile the vegetable oil or cut import taxes to rein in inflation.
Bangladesh cut import taxes on edible oils last week and Thailand, which is usually self-sufficient, made plans to buy 120,000 tonnes of palm oil to address a cooking oil shortage.
But a government official from India, the world's No.1 vegetable oil buyer, told Reuters that an existing 7.5 percent import duty on refined edible oils was very fair. India currently allows for tariff-free imports of crude oils.
China's authorities have rejected a proposal to cut soy and soyoil import taxes, local media reported, and Pakistan is unlikely to cut duties on shipments as it needs to shore up revenues.
"There is not much scope for import tax cuts for India but China might just surprise us," Mielke said. "But I don't think cutting import duties will be a factor that reduces inflation. People will still need to eat and governments need to import.