Wednesday, 17 June 2009

Dry spell may lift CPO above RM2,500

Phenomenon will result in lower production and supply shortage

A looming El Nino phenomenon, which brings in dry spells, can result in lower crude palm oil (CPO) production towards year-end and help restore prices to stay above RM2,500 per tonne, say analysts.

A mild El Nino is believed to have taken place over the past one month in South-East Asia and a full-blown effect could be felt by November.

Analysts said CPO prices on average would appreciate by 45% to 62% year-on-year based on the previous El Nino events.

The El Nino, which occurs irregularly once every two to seven years, would normally last 12 to 18 months each time.

Every few years, an unusually warm current flows off the western coast of South America. Its appearance after Christmas lead sailors in Peru to christian it El Nino, the Christ-child in Spanish.

Regions prone to El Nino include South-East Asia, southern Africa and northern Australia with prolonged dry periods while heavy rain falls, sometimes with flooding, in Peru and Ecuador.

A foreign-based brokerage, in its latest plantation report, said: “If El Nino hits as expected in November, this will be a bonus for (oil palm) planters.”

It said two potential CPO price catalysts in the final quarter of 2009 would be El Nino and production shortfall in both palm oil and soyoil.

According to Malaysian Palm Oil Board statistics, local CPO production had been below market expectations for the past two months.

For May, CPO production was up slightly at 1.39 million tonnes from 1.29 million tonnes a month earlier.

Malaysian Palm Oil Estate Owners president Boon Weng Siew said a strengthening El Nino could affect the growth of oil palm fresh fruit bunches (FFB).

“Due to the dry weather, the size of the palm fruits will be smaller and lesser in weightage. Smaller fruits will translate into lesser oil being extracted,” he told StarBiz.

He added that past experiences had shown that FFB production turned 10% to 15% lower in the event of an El Nino.

The La Nina’s (opposite of El Nino) reign last year, which brought heavy rainfall, was favoured for FFB development and higher yields in palm oil.

Boon said the full effect of the El Nino on FFB and CPO yields in local oil palm plantations could be felt within 18 months.

“This would mean CPO prices will likely trade above RM2,500 and even touch RM3,000 per tonne by 2010 on fear of shortage in supply linked to the El Nino impact,” he added.

It is expected that production from Indonesia and Malaysia, which control over 80% of the world’s palm oil production, could be affected by the El Nino phenomenon.

Last month, Malaysia – via Agriculture and Agro-Based Industry Ministry – announced plans to set up a committee to study the impact of El Nino on the agriculture industry.


Obviously, lower potential yield of FFB is expected as a consequence of hot and dry weather caused by El Nino phenomenon. There will be lesser Total Bunch Number and lighter Average Bunch Weight, the 2 important factors contributing to Yield per Hectare.

CPO price trading between RM 2,500 - 3,000 corresponding to lower crop production is predictable based on the 'Theory of Supply and Demand".

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