Palm stocks edge up with Golden Agri (E5H.SG) +0.7% at $0.775 and Indofood Agri (5JS.SG) +1.4% at $2.82; though volume is fairly light as the overall market is generally lackluster and investors are likely to be more cautious on palm plays now that most are near 2.5-year highs.

DMG, which is Neutral on the sector, notes Malaysia’s palm oil inventory started to decline last month as production began on a seasonal downcycle.

“This, plus the still-tight supply in 1H next year, should keep prices relatively firm and give plantation stocks the opportunity to appreciate further,” says analyst Selena Leong.

However, given the recent rainfall, she says a bumper crop is in the making “and we would see strong production from mid-2011 onwards.”

This could end the two-year price upcycle. First Resources (EB5.SG) is DMG’s top sector pick; rated Buy, targeting $2.05; shares are +0.7% at $1.54.