La Nina weather should boost 2017 palm oil yields, support prices

[KUALA LUMPUR] Additional rainfall from a potential La Nina is likely to improve palm fruit yields that will raise oil output in 2017, spurring a rebound in supply after severe dry weather this year.

The La Nina weather pattern, a cooling of the waters of the eastern Pacific Ocean that follows an El Nino, should bring nourishing rains to the palm plantations of Southeast Asia. The pattern also causes dry weather in South America that could support palm oil prices by crimping soybean yields and reducing the supply of competing soyoil.

Output from Indonesia and Malaysia, which produce nearly 90 per cent of global palm oil, should start recovering in the second quarter of 2017 after a smaller harvest this year because of the El Nino weather event, a warming of the Eastern Pacific waters, that caused dry weather in Southeast Asia, according to analysts.

"In the event of a La Nina... production for affected areas will generally see a recovery or better production year-on-year compared with pre-El Nino levels," said Rabobank palm analyst Kelvin Chow, adding that its growth rate depends on the rainfall received. "If moisture is abundant, we can see a 7 to 10 per cent increment in annual global output from my current projections."

Malaysia's production could reach 20 million tonnes in 2017, estimates Ling Ah Hong, director at Malaysian-based plantation research company Ganling Sdn Bhd, while output from neighbouring Indonesia is seen at 34 million tonnes, factoring in land expansion.

Malaysian production is forecast to drop to 19 million tonnes this year, while output from Indonesia is estimated at 32 million to 33 million tonnes.

Weather forecasters in Japan, Australia and the US predict a 50 per cent to 75 per cent chance of La Nina developing in the second half of 2016.

Global palm production rose nearly 13 per cent in the crop year ending in Sept 1999, and 10 per cent in 2008 - the years of the last two La Nina events, US Department of Agriculture data showed.

La Nina's drying effect across South America is expected to dent soybean output next year, raising prices. This could make palm more favourable, lifting demand and supporting prices despite the rising output. "A rally in soybean prices and other vegetable oils would give some support to palm oil prices due to substitution effects, but is unlikely to send palm oil prices to the levels seen in 2011," BMI Research said in a report.

REUTERS