Palm Oil Crop at Risk Across Southeast Asia as El Nino Looms

Apr 15, 2014 6:37 am ET

(Updates prices in fifth paragraph.)

April 15 (Bloomberg) -- Palm oil production in Southeast Asia, the largest growing region, is at increasing risk from the probable onset of an El Nino later this year after estates were already hurt by dryness in the first quarter. Prices advanced.

There could be a drop-off in rains if the weather event strengthens quickly, potentially affecting output that may have been curbed by the severe dry spell from mid-January to mid- March, according to Commodity Weather Group LLC. While there may be some improvement in moisture in the short term, the weather will turn drier in late May through July, said Donald Keeney, a meteorologist at MDA Weather Services in Gaithersburg, Maryland.

Forecasters from the U.S. to Australia are strengthening predictions for the arrival of an El Nino in 2014, and Goldman Sachs Group Inc. this week listed palm oil among the crops that could be hurt. The events, which affect weather worldwide, typically curb rains in Indonesia and Malaysia, the world’s two largest palm oil producers. An El Nino may also spur fires and increase haze across Southeast Asia.

“Normally, dryness cuts into production about six months out,” David Streit, a co-founder of Commodity Weather, said by e-mail, referring to palm oil. “So there should be a drop-off in July or August from the recent dry spell and then potentially again at the end of the year, if the El Nino strengthens.”

During the first-quarter dry spell, which drove parts of Malaysia into drought, futures on the Bursa Malaysia Derivatives rallied to 2,916 ringgit ($897) a metric ton in March, the highest price since September 2012. The benchmark rose 1.1 percent to 2,665 ringgit today, the highest price at close for futures since March 26.

Biggest Producers

Malaysia and Indonesia account for 86 percent of global output of the oil that’s crushed from fresh-fruit bunches for foods and biofuel, according to the U.S. Department of Agriculture. Water deficits have a lagged impact on output, with failure of fresh-fruit bunches after four to six months, followed by floral abortion at 10 to 12 months, and sex differentiation after 22 to 24 months, according to Hariyanto Wijaya, an analyst at PT Mandiri Sekuritas.

The chance of an El Nino during the southern hemisphere winter is now more than 70 percent, Australia’s Bureau of Meteorology said on April 8, citing weather models that showed a warming of the tropical Pacific. The U.S. Climate Prediction Center boosted the odds to 65 percent from 52 percent.

Goldman’s View

“Disruptions associated with El Nino have historically been most important on the agriculture markets, with the typically most negatively impacted crops being palm, cocoa, coffee, sugar,” Goldman analysts including Jeffrey Currie wrote in an April 13 report. “An El Nino event would skew risk to our soft commodity price forecasts to the upside.”

While the odds of El Nino are rising, there’s no certainty that an event will actually happen. Forecasts for El Ninos at this time of year were subject to lower performance, and the events can have varied impacts, according to Goldman Sachs.

Dryness this year should be more widespread and significant compared with June and July last year, when it was mainly focused in northern Peninsular Malaysia and the southwestern part of East Malaysia, said Keeney at MDA.

While the next two weeks may see rains of about 75 percent of normal, May and June may have slightly better-than-average totals, Streit said April 10. Most states in Peninsular Malaysia may get slightly below average rain in April, the meteorological department said on its website, citing predictions from the European Centre for Medium-Range Weather Forecast.

Dry Season

The southwest monsoon period in June, which signals the start of the regular dry season, coupled with less-than-normal rain in April, indicates an extended dry spell, said Faizal Parish, director of the Petaling Jaya, Malaysia-based Global Environment Centre. Haze, the smoke that’s caused by fires in peat lands across Peninsular Malaysia and the Indonesian island of Sumatra, could hurt palm oil yields, Parish said.

The onset of an El Nino would contribute to higher palm oil prices, Dorab Mistry, director at Godrej International Ltd., said in Beijing last month. There is increasing confirmation the event will develop from June to July, he said.

Output in Malaysia may total 19.2 million tons in 2013-2014 from 19.3 million a year earlier, according to the USDA, which forecast an 8.8 percent rise in Indonesian production to 31 million tons. While the oil is produced year-round, output is seasonal and varies from month to month.

Stockpiles in Malaysia increased 1.9 percent to 1.69 million tons in March from February as output expanded, according to the country’s palm oil board. The reserves are 22 percent smaller than the same month a year earlier.

Shares in Golden Agri-Resources Ltd., a producer listed in Singapore, have advanced 8.3 percent to 59 Singapore cents this year. PT Astra Agro Lestari, Indonesia’s biggest listed plantation company by market value, has risen 8.5 percent to 27,225 rupiah in Jakarta.