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Friday, May 1, 2009

Plantation: Swine flu hogs the limelight

CPO futures fell by 4%. Malaysian palm oil futures fell by as much as 4.3%
yesterday as global soya oil markets swooned on concern that an outbreak of swine
flu in Mexico may bite into the demand for meat and grains. Yesterday, CPO futures
fell by RM100-RM120 to RM2,405-2,690 per tonne (see Figure 1).
Background. Fear of a global flu pandemic is growing as new suspected cases of a
dangerous new strain of swine flu appeared around the world. It has killed up to 81
people in Mexico and spread to neighbouring US and also Canada. The virus is an
influenza that contains DNA from avian, swine and human viruses, including elements
from European and Asian swine viruses, according to the US Center for Disease
Control and Prevention. It is passed on by sneezing, coughing or through touch. It
probably originated in pigs though the Mexican government and the World Health
Organization have ruled out any risk of infection from eating pork.
Trade impact so far. Russia has banned all meat imports from Mexico and southern
US, and said that it would screen incoming passengers from those two countries for
swine flu by taking their temperatures. China has banned imports of pork products
from Mexico and parts of the US.We believe the potential impact of the swine flu outbreak on CPO price depends on
how it affects: (1) global economic growth and trade, and (2) the global poultry
business. The impact of the swine flu on the global economy depends on the duration
and severity of the outbreak. For comparison purposes, the most recent serious
outbreak that comes to mind is Severe Acute Respiratory Syndrome (SARS), which
hit Asia in 2003. The economics department of Asian Development Bank estimated in
2003 that the potential reduction of annual GDP growth to be 0.5% pts in southeast
Asian and 0.4% pts in east Asian countries should SARS last an entire quarter.
Our concern is that an extensive spread of swine flu to the US could deepen the US
recession and prolong the global economic downturn. This could, in turn, affect global
demand for edible oils including palm oil and lead to weaker prices. The good news is
that during the SARS outbreak, demand for palm oil or other edible oils did not drop
significantly despite the severity of the SARS episode. Based on Oil World stats,
global edible oil demand increased by 3.3% in Oct 02-Sep 03 while palm oil demand
rose by 10.6%. During the peak of the SARS epidemic, Malaysian CPO price fell by
RM101 per tonne or 6% mom in March 2003 and a further RM48 per tonne or 3%
mom in April 2003, due possibly to concern over weaker demand on CPO. However,
prices recovered towards the end of the year. Given the experience of handling
SARS, we do not expect a ham-handed response this time around as most countries

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