Manila, March 3 - Surging prices of copra could prompt coconut oil mills in the Philippines to slow production or risk incurring huge losses, a senior industry executive has said.
This, however, could further limit the supply of coconut oil available for exports and thus keep export prices high in the near term, said Danilo Coronacion, president of CIIF Oil Mills Group, the country's largest exporter of coconut oil.
The Philippines is the world's largest exporter of coconut oil and ships an average of 1 million tons a year. CIIF accounts for about 40% of the country's overall coconut oil exports.
"There's nothing you can do to control the exchange rate and export prices. What is left for you to manage is your production cost," Coronacion said in an interview.
To minimize losses while maintaining normal operations as possible, oil mills are likely to reduce their offtake of copra.
The recent surge in the prices of copra, the dried coconut meat from which oil is extracted, is likely to wipe out profits from recently-contracted export deals, he said.
"Most users will buy copra on a hand-to-mouth basis, hoping that prices will adjust," he said.
Current copra prices, hovering between 37 to 38.50 pesos($1=PHP40.80) a kilogram, are 30% higher from prices quoted early January.
"Considering the acceleration of prices, I imagine there will be significant default in contracts," Coronacion said.
He added, however, that CIIF would fulfill all its outstanding contracts as "maintaining a good name is more important."
To manage production cost, CIIF is now operating only two of its five oil mills, Coronacion said.
"We're downsizing our operations and at the same time optimizing our efficiency... We're really suffering from the distortions in the industry, in that most of our oil mills aren't backward integrated," he said.
Prices Buoyed By Adverse Weather, Costly Substitutes Philippine copra prices are driven by a combination of bullish factors, which include La Nina-induced adverse weather condition affecting major producing areas along the eastern border of the Philippines.
Such weather disturbance impedes harvesting, drying and processing of copra, Coronacion said.
La Nina is a weather phenomenon that brings above normal rainfall.
Also, early harvesting of nuts last year could further limit copra supply in the first half of the year, a traditional lean production season, he said.
Following typhoon-related tightness in copra supply for most of last year, coconut farmers have resorted to early harvesting of nuts in a bid to take advantage of high prices.
"The implication is that our exports in the next three months will be limited. What should be harvested this month may have been harvested last year," he said.
The prevailing tightness in copra supply has reduced Philippine exports of coconut oil in February to 78,980 metric tons, down 30% from 112,680 tons exported in January.
Tight Local Supply To Boost Copra Imports Tight domestic supply could lead to higher imports of copra, mainly from Indonesia and other Pacific islands, Coronacion said.
He said copra imports this year could reach 60,000 tons, compared with only 35,000 tons last year.
Copra prices also mirror gains in coconut oil export prices which are buoyed mainly by bullish influence of the bellwether palm oil and soy oil markets.
Soybean futures on the Chicago Board of Trade soared to a record high Friday with soyoil leading the rally on tight world edible oil supplies and strong global demand.
This steered crude palm oil futures on Malaysia's derivatives exchange Monday to reach another record high, breaking above the 4,200-ringgit-a-metric-ton level for the first time.
Coconut oil prices also hit a record high Monday with the March/April shipment being offered at $1,525-$1,530/ton, CIF Rotterdam and April/May at $1,530-$1,535/ton,CIF. These prices are higher by $50-$55/ton from prices offered Friday.