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Effects of the El Nino on Palm Oil Production

A commentary written by Chu Sin Yen


Effects of the El Nino on Palm Oil Production

The El Nino weather effect, a prolonged warming of the Pacific Ocean sea-surface temperature, occurs when the Ocean Nino Index (ONI) rises above the 0.5 threshold for 5 consecutive months. The ONI is the de-facto standard to measure deviations from normal sea-surface temperatures. A strong El Nino effect will bring severe dry spell especially to Southeast Asian countries, although the impact may not be immediately seen on palm oil production. Indonesia, Malaysia and Thailand are the three largest palm oil producing countries in Southeast Asia with a combined output of 90% of the world’s total palm oil production.

When Indian Ocean Dipole Meets El Nino

The Indian Ocean Dipole (IOD) also known as the Indian Nino, is an irregular oscillation of sea-surface temperatures and rainfall across the western Indian Ocean. During positive occurrence of IOD, eastern areas of Africa will receive heavy rainfall while the Indonesian archipelago and Australia will experience drought. A negative occurrence of the IOD does the opposite. When these IOD occurrences happen at the same time as El Nino, the El Nino effect could be further strengthened, creating a double trouble scenario.

Indian Ocean Dipole (IOD) vs. El-Nino.

Malaysia’s El Nino Forecast

In Malaysia, the El Nino is forecast to occur between June to August of this year and likely to last up until next year although more prominent in Sabah, the northern areas of Sarawak and the east of Peninsular Malaysia. However, the strength of the El Nino effect will not be known.

Malaysia El-Nino forecast June-August 2014.

Effects of El Nino on Palm Oil Production in Malaysia

  • Malaysia contributes 33% of the world’s palm oil production.
  • Planting area growth slowing down in the past few years due to land constraint.
  • Palm trees are mostly ageing; may need replanting to boost supply.
  • Palm oil production from January to May, 2014 up 7.4% compared to the same period in 2013.
  • The pressure remains and is expected to continue to build up going into Q3 of 201.
  • Palm oil prices need to be more competitive to maintain market share.

Effects of El Nino on Palm Oil Production in Indonesia

  • Indonesia contributes 54% of the world’s palm oil production.
  • Planting area growth increasing every year.
  • Palm trees are mostly young and immature; may drive up supply and production of palm oil.
  • Palm oil prices may decline due to rapid supply and production.

Global Palm Oil Production.

Effects of Prolonged Wet and Dry Conditions on Palm Oil Production.

El-Nino Effects

In conclusion, a prolonged El Nino effect on palm oil production may not be immediate with impact on price and supply likely to occur about six months later. However, severe El Nino weather phenomenon is more likely to cause palm oil prices to climb as nearby supplies tighten. In competing vegetable oil markets, supply shock is also likely to affect soybean and corn planted in Argentina due to El Nino-related flooding.

This post is contributed by Chu Sin Yen / Oriental Pacific Futures.

Chu joins Oriental Pacific Futures in the role of Quantitative Analyst. A travel and cycling enthusiast at heart, Chu currently pursues postgraduate studies in Mathematical Science at the Universiti Tunku Abdul Rahman (UTAR) where she was also a Research Assistant from 2011 to 2013.
 

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DISCLAIMER: This post is written for general information only. The author, publisher and/or any third party involved in the distribution of this work assume no legal responsibilities and shall have no liability whatsoever for any direct or consequential losses, costs or expenses arising from the use of the information contained herein.

 






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