OREANDA-NEWS. February 06, 2015. Malaysia's January palm oil end-stocks probably dropped to their lowest level in six months after flooding in the Borneo region coupled with seasonally low yields reduced output to the lowest level since February 2011.

The tighter inventories may fuel a rally in palm prices , which on Thursday surged over 5 percent to notch their biggest gain since Oct. 2010, buoyed by hopes that Indonesia's proposal to increase biodiesel subsidies will make blending profitable.

The price ended at a two-week closing high of 2,312 ringgit (\\$647) per tonne.

A median survey of six planters, traders and analysts forecast Malaysian palm oil stocks would end January at 1.77 million tonnes, down 12.2 percent from December and at their lowest level since July.

January's crude palm oil production is expected to fall 13 percent from December to 1.19 million tonnes, the lowest since Feb. 2011, after flooding in Sabah and Sarawak disrupted harvesting and reduced yields already stressed by dry weather early last year.

The two states supply about half of Malaysia's crude palm oil.

"We believe this was due to seasonal factors, tree stress from drought in parts of Malaysia in Q1 2014 and flooding in parts of East Malaysia due to the ongoing monsoon," said CIMB analyst Ivy Ng of the drop in output.

In December, the worst flooding in decades in Peninsular Malaysia killed dozens and displaced nearly a quarter of a million people. It also cut palm oil supply from the No.2 grower by 22 percent from November.

Exports, however, were also weaker, preventing a bigger drop in stockpiles.

Shipments of Malaysian palm oil products in January were forecast to be down 15.1 percent at 1.29 million tonnes due to weaker demand from China, Europe and India.

The median figures from the survey imply domestic consumption in January of 232,218 tonnes.

A proposal by President Joko Widodo's government to ramp up Indonesian biodiesel subsidies passed another important legislative hurdle late on Wednesday, when a parliamentary committee backed a near-threefold increase in the subsidy to 4,000 rupiah (32 U.S. cents) per litre from 1,500 rupiah.

If passed, the law could translate to bigger domestic consumption of palm oil in the world's top producer, a timely measure as the tropical oil struggles in the face of weak crude oil prices that have wiped out biodiesel margins.

A Reuters survey of 22 analysts and traders showed that palm oil prices may inch up this year after chalking up losses of nearly 15 percent in 2014, but soaring supplies of rival oilseeds will offer stiff competition.

Some planters say the recent flooding in Malaysia could push up palm oil yields, adding pressure to a well-supplied market.

"There will be a productivity boost with all the water that has gone into the fields," said an official with a plantation firm in Malaysia. "Palm loves water and sunshine. When they get both of them, like now, it's going to boost yields."