El Nino to lift CPO prices

KUALA LUMPUR: Palm oil prices may rise at a feverish pace should an El Nino weather pattern spur drought across Southeast Asia, drying up palm oil output across Indonesia, Malaysia and southern Thailand.

On Monday, the Australian Bureau of Meteorology announced a substantial El Nino weather phenomenon for 2015. Japan weathermen said while the thresholds were not met until now, they expect a significant event this year.

Incidentally, the Bursa Malaysia derivatives market have started to 'heat up' with the third month benchmark crude palm oil (CPO) futures hitting a high of RM2,225 per tonne a couple of days ago. Yesterday, palm oil futures slid RM27 to close at RM2,198 per tonne.

In an interview with Business Times, Malaysian Estate Owners Association (MEOA) president Joseph Tek Choon Yee recalled there were many El Nino forecasts a year ago but somehow, it did not happen. It was like the boy who cried wolf.

In March 2014, palm oil prices reached a high of RM2,922 per tonne in anticipation of an El Nino phenomenon. 

As the threat dissipated, prices plunged to a low of RM1,943 per tonne in September before recovering to RM2,250 per tonne in December.

By mid-February 2015, Tek noted many MEOA members in Sabah began to experience bone-dry episodes at their estates.

"We recorded single or at best double digit millimetres of monthly rainfall. Coupled by last year’s dryness, lower rainfall and rain-days in many parts of Borneo, crop production is not going to be as strong," he said.

CIMB Investment Bank senior analyst Ivy Ng said lower rainfall and soil-moisture levels can hurt yields after a lag, with the effects of dry weather typically felt 10 to 12 months or 22 to 24 months later.

A moderate El Nino, combined with a strong execution of a biodiesel mandate in Indonesia, could benefit prices towards the end of 2015. In the near term, gains may be limited on seasonally high supply and reserves, she said in her notes to investors.

Explaining the impact of El Nino on plam oil trees, MEOA’s Tek, who read botany and plant breeding, said: “We will see an immediate delay in ripening of bunches and dangers of fire hazards in estates.

"A half year lag-effect will see some bunch failures and lower crop production. The second lag-effect of flower abortion will ensue a year later with even lower crop output," he said.

"And a final two-year lag effect will see drastic slash in crop harvests due to the palms sprouting more male flowers. Only female flowers can eventually form into bunches,” he added.

Asked if Malaysia is still able to harvest 20 million tonnes of oil this year, Tek said it depends on the severity of moisture stress.

He cautioned weather prospect is just one of the many factors determining price. Competing edible oils, crude mineral oil, inventory level and policies can also impact prices.

“As at end- April, Malaysia's CPO stock surpassed 2 million tonnes, following a stronger output set against weaker exports. However, there were probably delays in CPO exports in order to derive benefit from zero export tax starting next month," he said. 

"With Ramadan around the corner and Indonesia pushing ahead with its biodiesel programme, I want to believe, this time around, in the wake of an El Nino, there will be an upward push in prices.”

When pressed for a forecast, Tek replied, “Let’s hope it can trade up between RM2,300 and RM2,400 per tonne.”