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.

Something2Share:

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".

CPO prices to get full La Nina effect by end-May 2009

Crude palm oil (CPO) prices will get the full impact of the rising La Nina weather risks, which are threatening major oilseeds and grain growing areas in the US and South America, by end-May 2009.

La Nina, usually marked by wet weather and abnormal heavy rainfall, was expected to disrupt the 2009 planting season for oilseeds and grains like soybean and corn in the US in March and April, a plantation industry consultant told StarBiz.

He said La Nina could also affect the harvesting season for soybean in Brazil and Argentina from February to April.

“All will depend on the length (time frame) of the La Nina weather pattern in 2009,” the consultant added.

He expects any disruption in planting or harvesting of soybean crops in 2009 would help bolster the currently-weak prices in most agriculture-based commodities, including CPO.

The world encountered a lengthy La Nina phenomenon from 1998 to 2001.

In 2001, it was reported that US farmers planted 1.6% less acreage of soybean and 4.8% less acreage of corn due to the wet weather caused by La Nina.

An analyst with a bank-backed brokerage said that increasing weather volatilities worldwide such as heavy rainfall in South-East Asia and drought in Australia last year led world markets to raise the risk premium for agricultural commodities.

In Malaysia, he said, abnormal heavy rainfall early last year created floods in major oil palm plantation areas like Johor and Pahang, giving a short-term boost in CPO prices.

Meanwhile, plantation stocks were traded higher on Bursa Malaysia yesterday as the CPO price closed above RM1,600 per tonne in line with soybean oil gains on the overnight Chicago Board of Trade.

On Bursa Malaysia Derivatives, the benchmark CPO for March delivery closed RM81 higher at RM1,671 per tonne.

Something2share:

Obviously there will be a greater demand of CPO if there will be less soybean oil due to adverse weather of La Nina affecting soybean crop production and harvest in 2009. Let hope for the rebounce of CPO price as predicted.

Oil palm planters may get cess respite from Govt

I believe my planter friends working abroad will be glad to be updated if they have missed reading the news reported in today thestar online:

The Government is considering a reduction in the Malaysian Palm Oil Board cess payment or even suspend it for a certain period to assist planters in dire straits.

Primary Industries and Commodities Minister Datuk Peter Chin Fah Kui said the Government was willing to look into these options if there was justification that “the cess is truly burdening local planters” given the sharp fall in crude palm oil (CPO) prices.

“I am a reasonable minister. Give me the breakdown on the planters’ respective cost of production and at which CPO price level would these planters hit rock bottom. If necessary, we will audit them,” he told StarBiz in an interview.

Based on annual CPO production at 18 million tonnes and palm kernel production at two million tonnes, the total cess collection is estimated at RM220mil.

Local oil palm planters have been paying about RM11 per tonne in MPOB cess (see table for breakdown).

They also had to pay an additional cess of RM4 per tonne for the Palm Oil Price Stabilisation Fund.

MPOB’s revenue was mainly from cess collection (research and development and licensing enforcement) of RM9 per tonne of palm oil and palm kernel oil produced at the mills and crushers.

Chin, however, said: “To do away with the MPOB cess is like asking us to do away with MPOB, the central body, which takes care of the well-being of the local palm oil industry.”

Citing an example, he said a reduction of 13.3% in MPOB cess provided only about 40 sen savings for every tonne of fresh fruit bunches (FFB) produced.

This would mean the cess of RM11 per tonne of CPO will be reduced to RM9 per tonne while in FFB terms, the cess will be reduced from RM2.20 per tonne to RM1.80 per tonne.

However, Chin said, there was an imposition of a sales tax of 7.5% in Sabah and 5% in Sarawak.
In fact, a reduction of 13.3% in sales tax in Sabah, for example, would provide a higher savings of RM3 for every tonne of FFB produced, he added.

Chin said the Government was looking at various avenues to mitigate the plight of oil palm planters, especially smallholders, due to the weak CPO prices and excess palm oil inventory at 2.3 million tonnes.

“We have counteracted immediately by allocating RM200mil for replanting activities and RM200mil for biofuel initiatives,” he added.

Chin said the Government’s early intervention had stabilised the CPO prices at RM1,500 to RM1,600 per tonne currently.