Palm oil at risk as haze envelops world's biggest growers

[KUALA LUMPUR] A haze that's engulfed parts of the world's biggest oil palm-growing region in Southeast Asia threatens to stunt fruit growth and disrupt harvesting during the peak production season.

The smog worsened this week, forcing Indonesia to deploy military personnel to fight forest fires and water bomb the rising number of hot spots.

In Malaysia, flights were diverted due to low visibility and around 2,000 schools were shut as air quality in some states reached unhealthy levels. Palm oil production may decline 10 per cent to 20 per cent in the affected areas, according to Purushothaman Kumaran, chief financial officer at IJM Plantations Bhd.

A prolonged haze amid the strongest El Nino in two decades may hurt oil palms in the coming months and can potentially support prices which slumped to a six-year low in August. Heavy haze curtails the amount of sunlight reaching trees and hinders photosynthesis, resulting in lower yields six months down the line, according to Malaysian plantation consultant Ganling Sdn. The blazes are often started to clear land for plantations.

"The palm is under stress," Ling Ah Hong, director at Ganling, said by phone on Sept 15. "If the haze prolongs over a long period, like a month or two, there may be some impact on production because it affects photosynthesis activity of the palm trees."

Palm plantations are already bracing for dry weather caused by the El Nino. The weather pattern will peak around the end of the year and sea temperatures may exceed, or come close to, the those seen during the record event in 1997-98, according to Australia's Bureau of Meteorology.

The strong El Nino will be "good news" for palm oil prices, which usually spike during the event and lift plantation stocks to outperform, Credit Suisse Group AG said in a report dated Sept 14. Palm oil futures on the Bursa Malaysia Derivatives traded at RM2,116 (US$499) a metric ton by 3:52 pm in Kuala Lumpur on Thursday, having plunged to a six-year low of RM1,867 last month.

At the time of the 1997-98 El Nino event, palm oil prices doubled in 12 months as output dropped 7 per cent in Indonesia and fell 5.5 per cent in Malaysia.

The haze has sent the air pollutant index in Pontianak, West Kalimantan soaring past the hazardous levels, while capital cities in Riau province and South Sumatra recorded unhealthy levels. That may keep plantation workers indoors, according to Kuala Lumpur Kepong Bhd.

"The question is, can people go out to work? This is what we need to watch carefully," Roy Lim, group plantations director at Kuala Lumpur Kepong, Malaysia's third-largest producer, said by phone.

The smog may also choke weevils, or beetles, which aid in pollinating palm fruits.

"It doesn't just affect humans, it affects insects as well," said Michael Greenall, managing director and head of Asian agribusiness at BNP Paribas SA in Kuala Lumpur.

BLOOMBERG