Of El Nino and vegoil output

THE plantation sector was the best performing in June among Bursa Malaysia’s 13 sectorial indices. Market data show the sector index was up 4.2% month-on-month mainly due to local fund buying as foreign funds continued their selling with RM2.4bil in net outflows from the local equity market.

The buying suggests smart money is making early bets on a developing thematic – the return of the El Nino climate event in a much warmer world over the past eight consecutive years.

In June, the US National Oceanic and Atmospheric Administration (NOAA) officially issued an advisory that El Nino conditions are already present in the tropical Pacific and the probability of a “strong to very strong” event rising to 62% by December.

That means acreages in major edible oil production regions like Argentina, Brazil, Australia, the United States, Indonesia and Malaysia could face heat and drought stress from the naturally occurring weather phenomenon.

Output in major buyers like China and India won’t be spared either.

El Nino can also see higher precipitation in other parts of the world. So, it could lead to higher agricultural outputs in places like the southern United States.

The impact from El Nino will take months to develop and predicting outcomes is difficult as no two El Ninos are alike.

However, any major net fall in production levels could represent a critical catalyst for supply disruptions and subsequent price movements in the agricultural commodities supply chains, depending on the strength of the El Nino.

Goldman Sachs estimates a very strong event could lift global wholesale food prices by roughly 16% by 2028.

The years 2015/16 were the last time a strong El Nino occurred. Its impact on the local plantation sector varied according to companies and geography. Sabah saw a 14.5% drop in yields, while Peninsular Malaysia experienced a 16% decline, reports note.

Kuala Lumpur Kepong Bhd’s (KLK) financial year 2016 (FY16) noted palm oil yield per ha had eased to 4.42 tonnes per ha, the lowest in a decade, and a 10% reduction from FY15 onwards.

Charts show this didn’t really translate into a sharp rise in the share price of planters like KLK or IOI Corp Bhd. That would be a function of earnings.

KLK and IOI’s shares haven’t risen much now either, but the June announcement by NOAA and the Indonesian government’s move to centralise major commodity exports have helped the share price trajectory reverse upwards.

At the very least, El Nino offers a higher price support level from a technical perspective. The demand supply fundamentals of the edible oils market is already strong without an El Nino event.

Even as the Iran war premium on crude oil corrected, edible oil prices have held their ground.

Policy decisions are driving prices now. Energy security and higher biofuel mandates in Indonesia and the United States have put a floor to prices and intensified competition with demand for food consumption purposes.

The economics of biodiesel mandates, however, will become more challenging if fossil fuel prices go lower post-Iran war, raising questions around margins, subsidy dependence and long-term competitiveness.

Meanwhile, the availability of oils like sunflower oil from the Black Sea region is a concern, while major buyers like India are short on stocks.

On the supply side, the production of vegetable oils has entered a period of structural transformation characterised by a significant loss of momentum in palm oil growth and a compensatory expansion in seed-based oils like soybean and sunflower oil in more challenging operating environments and climate change.

While world production of vegetable oils previously doubled every 10 years, reaching 85 million tonnes for palm oil recently, the industry is now facing a slowing growth rate across all four major oils – palm, soybean, rapeseed and sunflower.

Palm oil, the longstanding global production leader, has lost some of its growth momentum due to constraints on new acreages and, as a result, is rapidly losing market share, industry experts warn.

Although some 25 million ha have been planted with soybean, sunflower, rapeseed and other edible seed oils over the past five years, global consumption is expected to exceed production for the 2025/26 season, leading to a drawdown of stocks.

This imbalance could go on into the 2026/27 season and later with a strong or super El Nino in play.

The outcomes of the agricultural economy are far more sensitive to water and heat than, say, fertilisers.

With climate change a mega-trend to consider, the upcoming El Nino could be a yardstick to prepare for future climate shocks to agricultural production levels across the world in a much warmer globe.