If El Nino becomes a reality this year, it is set to affect palm oil production and supply, as well as global prices.
The hot and dry spell experienced in the last few months had people wondering whether they were under the spell of the El Nino weather phenomenon.
Yet it appears that it was a false alarm, as the Malaysian Meteorological Department dismissed any such speculation, and the situation has since returned to some sort of normalcy over the past two months.
However, this respite may be short-lived, as experts are predicting that El Nino will hit us in the near future.
The palm oil industry is bracing itself for this imminent weather anomaly, where rainfall will be affected by the warming of the ocean.
It’s a crucial time of the year for palm considering its dominance in the global oils and fats trade, and its emergence as the fastest growing edible oil worldwide, with an average growth of 7.3% per annum against the world’s other big player, soybean oil, which grew just 3.3% per annum in the last decade.
And so much is dependent on the two biggest suppliers, Indonesia and Malaysia, who account for 51% and 34% of world palm oil production respectively.
That translates to about 58 million tonnes of crude palm oil, where even a 10% drop in yield in El Nino-inflicted cases can be catastrophic to supply worldwide, says Ling Ah Hong, director of Malaysian plantation consultancy and investment company Ganling.
“Weather is a key determinant in the supply equation of palm oil, and there has been below average rainfall in Indonesia, Malaysia and even Thailand (the world’s third largest palm oil producer) in recent years and months.
“If you look at Indonesia, it has suffered from bad weather over the past three years,” says Ling, who has over 30 years of experience in the plantation industry.
Ling was one of the speakers at a talk on El Nino – its effects and implications – organised recently by the Malaysian Palm Oil Council (MPOC) that gathered participants from various sectors of the industry.
Ling says the the most recent El Nino drought in 2009/10 had caused a drop in the palm oil yield of about 6%. However, it is usually the supply of other oil seeds that get drowned first in any El Nino event, with the effect on palm oil not as immediate.
“Any effect on palm oil is only felt between six months and a year later, and this is usually followed by a spike in its prices due to the disruption in supply,” notes Ling.
The last severe El Nino phenomenon took place about 17 years ago, between 1997 and 1998. If history is to be considered, a severe El Nino phenomenon would take place every 10 to 15 years, he adds.
“An El Nino-induced drought or prolonged dry weather conditions can be interpreted as having eight to 20 weeks of low rainfall, which will create moisture stress in palms. There will be a lagged effect on production after a El Nino occurrence – this means a drop in production caused by different factors in correlating time periods.
“They include bunch failure, which usually happens between four and six months, and palm floral abortion that can occur some 10 to 12 months later. At 22 to 24 months, the plant’s sex differentiation process can also experience complications – this is where the palm will produce a higher proportion of male to female flowers, resulting in lower yield and production.
“Factoring all of the above, normal production may be reduced by as much as 30% depending on the severity of the drought.”
He says that the prolonged dry weather situation from Perak to Johor as well as in Central and South Sumatra in mid 2013 and the first quarter of 2014 will impact supply towards the end of this year and 2015.
The emergence of El Nino in the second half of 2014 will further aggravate the supply situation in 2015.
“Whether El Nino will materialise in the next three to six months makes 2015 an interesting year to watch.
“With consecutive bad weather patterns in the last few years and the emerging El Nino, my view is that stock would likely remain low and below the long-term trend-line in the coming years.
“Owing to the dry weather, the looming palm oil supply tightness will be a key catalyst to an upward price movement in 2015. In fact, the price has spiralled up in March because of speculation of an emerging El Nino.
“However, plantation companies in Indonesia and Malaysia should generally fare better this year than in 2013, as we are already experiencing a price uplift by about 14% so far,” adds Ling.
The Malaysian Meteorological Department’s National Climate Centre director Jailon B. Simon says El Nino is expected to happen anytime from now to August, and may last through next year.
“Since April, almost every El Nino-Southern Oscillation indicators reflect a progression towards El Nino, and the chance of it happening increases as we move into the remainder of 2014.
“The impact may be felt by Malaysia towards the end of this year and first quarter of next year, but that would depend on the intensity. It will be more prominently felt in Sabah, northern Sarawak and the east coast states of the Peninsula.
“So, while the strength of this El Nino remains unknown, most climate forecast models are predicting a weak to moderate one,” says Jailon.
He cautions, however, that a dry weather spell can still happen without El Nino coming into play.
This is especially so as different towns and cities in Malaysia have had record breaking numbers of consecutive days without rainfall this year, such as Batu Pahat, Johor (36 days); Butterworth, Penang (35 days); KLIA, Sepang (33 days); Kluang, Johor (65 days); Kuala Krai, Kelantan (59 days); Kuala Pilah, Negeri Sembilan (58 days) and Kuala Terengganu (45 days), among others.
Palm oil broker Loh Kin Kien, who has been in the industry for over 25 years, admits that it has been a “cry wolf” situation so far, with no signs of an El Nino phenomenon in Malaysia or Indonesia.
However, with Australia and the Philippines currently registering relatively high temperatures, all reputable weather forecasters agree that there is a 70% probability of an El Nino occurance, he says.
(The El Nino causes heat waves in Australia and South-East Asia and can bring excessive rainfall in the Americas, while La Nina is just the opposite).
“In any severe El Nino or La Nina scenario, palm oil (production) can be disrupted, resulting in a price spike and also an inverted market as nearby supplies tighten. Supply replenishment is vital, and if this is disrupted, a supply bottleneck is what you get, spiking prices up.
“So, until and unless El Nino hits, palm oil supply and stock will continue building up for the third quarter of this year, which should keep prices low.
“In fact, Malaysian palm oil production so far this year has been above our estimates; the first half has been 10% higher than the same period last year,” says Loh, disagreeing with Ling’s view earlier that our oil stocks have been low.
“Palm oil supply has been picking up compared to the last three years, which plateaued in the face of unfavourable weather. Also, there has been increases in the planted acreage (of oil palm) the past few years that would sufficiently offset a possible drop in (oil) yields later in the year.”
Loh says that with supply building up, palm oil prices need to become more competitive and sold more aggressively to maintain market share. If it is not sold cheaper (than other competing oils), there will be excess in stocks which edible demand hasn’t been able to absorb it all.
“So all this build-up will eventually pressure prices to levels where it can be burnt as fuel. I do not see much upside for palm oil this year, but a timely emergence of El Nino should provide a price bonus for next year’s market.”