KUALA LUMPUR: Palm oil production in Southeast Asia is at increasing risk from the probable onset of El Nino later this year, after estates were already hit by dryness in the first quarter. Prices advanced.

There could be a drop-off in rain, 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, meteorologist at MDA Weather Services in Gaithersburg, Maryland.

Forecasters from the US to Australia are strongly predicting the onset of El Nino this year and Goldman Sachs Group Inc has listed palm oil among the crops that could be hit. Such conditions, which will affect the weather worldwide, typically curb rainfall in Indonesia and Malaysia, the world’s two largest palm oil producers. El Nino may also cause fire and increase haze in Southeast Asia.

“Normally, dryness cuts into production for about six months,” David Streit, co-founder of Commodity Weather, said by email, 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 El Nino strengthens.”

During the dry spell in the first quarter, causing drought in parts of the country, futures on the Bursa Malaysia Derivatives rallied to RM2,916 a tonne in March, the highest since September 2012. The benchmark rose as much as 1.3% to RM2,669 yesterday, the highest since April 2, and ended the morning session at RM2,667.

Malaysia and Indonesia account for 86% of the global output of palm oil, which is used in food and biofuel products, according to the US Department of Agriculture.

The chance of El Nino occurring in the southern hemisphere is now more than 70%, Australia’s Bureau of Meteorology said on April 8, citing weather models that showed warming of the tropical Pacific. The US Climate Prediction Centre boosted the odds to 65% from 52%.

“Disruptions associated with El Nino have historically been most vital in the agriculture markets, with the typically most negatively impacted crops being palm, cocoa, coffee, sugar,” Goldman analysts wrote in an April 13 report.

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 Sabah and Sarawak, said MDA’s Keeney.

While the next two weeks may see about 75% of rainfall, May and June may have slightly better-than-average totals, Streit said on April 10. Most states in peninsular Malaysia may get slightly below average rain in April, the meteorological department said on its website.

The southwest monsoon period in June, which signals the start of the regular dry season, coupled with the less-than-normal rain in April, indicate an extended dry spell, said Faizal Parish, director of the Global Environment Centre. Haze could hurt palm oil yields, Parish said.

The onset of El Nino would contribute to higher palm oil prices, Dorab Mistry, director at Godrej International Ltd, said in Beijing last month.
While the oil is produced year round, output is seasonal and varies from month to month.

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

Shares in Golden Agri-Resources Ltd, a producer listed in Singapore, have advanced 7.3% to 58.5 Singapore cents (RM1.52) this year. PT Astra Agro Lestari, Indonesia’s biggest listed plantation company by market value, has risen 8.5% to 27,225 rupiah (RM7.73) in Jakarta. — Bloomberg

This article first appeared in The Edge Financial Daily, on April 16, 2014.