KUALA LUMPUR (Oct 25): The likelihood of a strong La Nina weather condition by the end of this year could see crude palm oil price surging to RM3,500 per tonne, said MIDF Amanah Investment Bank Bhd today.

La Niña is the positive phase of the El Nino Southern Oscillation and is associated with cooler-than-average sea surface temperatures in the central and eastern tropical Pacific Ocean.

Its analyst Alan Lim said in a note to clients that a strong La Nina would have a significant impact on palm oil production because excessive rains in Malaysia and Indonesia leading to floods can be expected.

The production in flood prone states may be affected. Overall, the news is slightly positive to palm oil price but the magnitude of impact will depend on whether La Nina eventually materialises and its strength.

"Coupled with labour shortage problem which is still affecting the industry, we expect palm oil price to surge to RM3,500 per tonne if a strong La Nina materialises," he said.

Lim based his analysis on the Australia Bureau of Meteorology's (ABM) activation of its La Nina Watch yesterday that showed a 50% chance of La Nina forming in late 2017.

He said ABM's models suggested the tropical Pacific Ocean will continue to cool, making the chance of a La Nina forming in late 2017 at least 50%, around double the normal likelihood.

However, ABM noted that the indicators need to remain at La Nina levels for at least three months to be considered an event.

Meanwhile, MIDF expects the October inventory to rise 4% month-on-month to 2.09 million tonnes, and assumed month-on-month increase in production of 3%, and export at 6%.

"We believe that palm oil demand should be supported by good export growth to India as the pre-stocking activity should continue.

"Our export assumption is deemed conservative as cargo surveyors' data shows growth of 18% in export for the first 10 days of October. For production growth, we are using seasonal factor to estimate the 3% increase," he added.

He maintained a "neutral" call on the sector with near-term expectation of palm price to trade at between RM2,700 and RM2,950 per tonne.