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DJ. Crude palm oil futures on Malaysia's derivatives exchange fell Monday to the lowest level in 10 months, as investors liquidated positions amid worries about a buildup in palm oil inventories at a time when CPO production is seasonally higher.

The benchmark October contract on Bursa Malaysia Derivatives fell as much as 2% to 2,825 ringgits a ton during afternoon trade, a level not seen since Oct. 15. The contract ended 0.4% lower at MYR2,871/ton.

Stockpiles in Malaysia rose to 2.0 million tons as of July 31, climbing quickly from a 14-month low of 1.70 million tons on the back of strong production and lower CPO demand.

"As prices have breached major support levels today, I think palm oil's downside is limited for now as Malaysia's palm exports are likely to pick up thanks to the recently-announced additional tax-free CPO quota," a trading executive in Kuala Lumpur told Dow Jones Newswires.

Toward end-July, the government allowed the export of an extra 2 million tons of CPO at zero duty to prevent a build-up in stocks in the high production months that would have weighed on prices.

The decision takes the overall duty-free export quota to 5.6 million tons for 2012, equivalent to 30% of Malaysia's overall CPO output.

Optimistic market participants also said inventory levels will eventually stabilize or ease as price-sensitive consumers soon switch from soyoil, which is commanding a wide premium to its cheaper tropical rival.

"The substitution effect from poor U.S. soybean output could kick in as early as next month, when [the U.S.] harvesting season begins," OSK Investment Bank analyst Alvin Tai said in a note Monday.

Palm oil stockpiles had risen to 2.0 million tons as of July 31, climbing quickly from a 14-month low of 1.70 million tons June 30, the Malaysian Palm Oil Board said in a crop report Friday.

CBOT soybean and soyoil prices have risen in recent weeks on the back of expectations of reduced supplies due to drought in major oilseed-growing areas of thee U.S. Midwest, with soyoil prices on the Chicago Board of Trade opening up a premium of $300/ton against palm oil compared with a historical average around $100/ton.

In the cash market, refined palm olein for August was offered $5 higher at $955/ton while cash CPO for prompt shipment was offered unchanged at MYR2,750/ton.

Open interest on the BMD was 141,988 lots, versus 142,561 lots Friday. One lot is equivalent to 25 tons.

A total of 32,729 lots of CPO were traded versus 28,006 lots Friday.

Ending BMD CPO futures prices in MYR/ton: 
Month   Close  Previous  Change   High    Low 
Aug'12  2,817     2,830     -13  2,890  2,700 
Sep'12  2,830     2,843     -13  2,851  2,780 
Oct'12  2,871     2,882     -11  2,903  2,825 
Nov'12  2,900     2,909      -9  2,926  2,857 
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